Strategy for Penetrating Engineering & Construction Markets
In Southeast Asia for Singapore through BOT Contract
by
Dominic Chi Ho Fung
B.S. Civil Engineering
Columbia University, 2001
SUBMITTED TO THE DEPARTMENT OF CIVIL ENGINEERING IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF SCIENCE IN CIVIL ENGINEERING
AT THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
SEPTEMBER 2002
C 2002 Massachusetts Institute of Technology. All rights reserved.
Signature of Author:
Department of Civil Engineering
August 23, 2002
Certified by:__
J
Fred Moavenzadeh
Professor of Engineering Systems and
Civil & Environmental Engineering
Accepted by:
Oral Buyukozturk
Chairman, Departmental Committee on Graduate Studies
MASSACHUSETTS INSTITUTE
OF TECHNOLOGY
SEP 1 9 2002
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LIBRARIES
BARKER
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Strategy for Penetrating Engineering & Construction Markets
In Southeast Asia for Singapore through BOT Contract
by
Dominic Chi Ho Fung
Submitted to the Department of Civil Engineering on
August 23, 2002 in Partial Fulfillment for the
Degree of Master of Science in Civil Engineering
ABSTRACT
Singapore's economy is currently making structural adjustments resulted by the Financial
Crisis of 1997, the burst of the Internet bubble in 2000, and the emergency of different
powers in the region. Its export-oriented manufacturing and trading model, which has
served the city-state well in the last decades, has gradually added a new driver in
services. Yet, Singapore still faces the problem of having much of its success dependent
on its export-oriented manufacturing. At the same time, privatization of public
infrastructures has just started to take shape in Southeast Asia. The concept of
privatization will unlock an unlimited amount of engineering & construction business
potential. Together, these two major economic forces present a special opportunity for
Singapore to use Build-Operate-Transfer (BOT) project delivery method to not only
capture a solid share in the privatization market, but also secure a long-term demand for
its engineering & construction services, and facilitate the city-state's dependence on
manufacturing and trading. The goal of this paper is analyzing the prospect of this
proposal, and to provide strategic planning that will maximize the gains for both
Singapore and Southeast Asian countries, as well as minimize the risks they have to take.
Thesis Advisor: Fred Moavenzadeh
Title: Professor of Engineering Systems and Civil & Environmental Engineering
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Acknowledgement
I would like to thank Professor Moavenzadeh for providing guidance throughout the
research project and making insightful suggestions on the methodology of the research,
Professor Sammi for supporting me with crucial statistics that make the study possible,
and all other fellow MIT students who have contributed ideas to this work.
I am also indebted to my family for giving me unconditional support throughout the
years. My father has been painstakingly advising me on the way to handle myself and to
make changes in other people's lives whenever possible. My aunt has been looking after
me all through my college career; I would have had a much more difficult college
experience without her emotional support. And I would like to dedicate this paper to my
mother, who does not have the chance to see my going through college, but forever loved
and respected by me, among many others.
Lastly, I would like to express a special gratitude to Kathy (Chuy) and her family for
being very caring to me in the last two years. They change my life and the way I am
going to live it.
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Table of Contents
Topic
1.0
1.1
1.2
1.3
1.4
Page
Introduction ...................................
..
.............................
Singapore's Competitive Advantages...............................................9
The BOT Solution.....................................................................
O bjectives...............................................................................
A pproach .................................................................................
2.0
2.1
2 .1.1
2.1.2
2.1.3
2 .1.4
2.2
Singapore - Challenges & Opportunities.............................................
C hallenges...............................................................................
E nergy ......................................................................................
Agriculture & Water.....................................................................
H um an C apital..........................................................................
L and ....................................................................................
.
O pportunities............................................................................27
3.0
3.1
Self A ssessm ent...........................................................................29
Singapore's Social Structure & Construction......................................
4.0
4.1
4.2
4.3
The BOT Solution......................................................................41
Background of BOT Solutions......................................................
41
The BOT Structure.....................................................................43
Role of the Host Government........................................................48
5.0
5.1
5.1.1
5.1.2
5.1.3
5.1.4
M arket Analysis.........................................................................
Sector of Interest.......................................................................
A dvantag es.................................................................................5
D isadvantages..........................................................................
C ompetition ..............................................................................
C onclusion ..............................................................................
50
51
1
52
53
56
5.2
Current Development................................................................
57
5.2.1
Location .................................................................................
57
5.2.2
V olum e E stimation.......................................................................
64
5.3
Extensiveness of BOT..................................................................69
6.0
Market Assessment.............................................................74
6.1
Privatization of Public Infrastructures..............................................
6.2
6.3
6 .3 .1
6 .3 .2
Market Consolidation................................................................
79
The Financial Crisis of 1997..........................................................82
C au ses....................................................................................
. 82
Effect....................................................................................
. 84
7.0
Implementation Schemes.................................................................
7.1
7.1.1
Penetrating Strategies............................................................
Traditional, Project-based........................................
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no.
8
9
10
11
12
22
22
23
24
. 25
29
74
89
.89
89
7.1.2
7.1.3
7.1.4
7.1.5
7.1.6
7.1.7
7.2
7.3
7.4
Traditional, Country-based...............................................................90
Partnership, Project-based................................................................91
Partnership, Country-based............................................................91
Management Contracts.................................................................92
Purchase Services from a 3 rd Country................................................92
Merger & Acquisition.....................................................................93
94
Strategy Selection......................................................................
Capacity & Goals.........................................................................98
100
Risk A nalysis...............................................................................
8.0
C onclusion..................................................................................
9.0
Al.
A2.
A3.
A4.
A5.
A6.
104
A ppendix ....................................................................................
Tariff Reduction in selected Asian Countries..........................................104
Structure of Imports from & Exports to the United States......................... 104
105
Quarterly Singapore Property Market Indicators.....................................
105
Deduction logic for Asset Market Supply..............................................
Time-serial regression results of Contract Amount in Singapore..................106
Top International Transit and Railway Turnkey System Contractors selected by
Jane's Asian Infrastructure Monthly....................................................107
108
Major Construction Bids Announced (1999/1-2002/5)..............................
109
Regression results on demand for Transport Systems................................
by
borrowers
Asian
to
lending
Bank
World Bank & Asian Development
111
Sector........................................................................................
A7.
A8.
A9.
10.0
Literature.....................................................................................112
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103
Introduction
1.0
Ever since the mid 1980's, Singapore has shifted its industrialization strategy from being
an offshore manufacturing center to a high-tech production location. Such a shift pays
Singapore huge dividends as the city-state bolstered both the quantity and quality of its
exports in the 1980's and the 1990's. At the same time, however, Singapore finds itself
increasingly correlated to that of its biggest trading partner, the United States, and to its
biggest exports type, electronics parts.' This correlation presents a disadvantage that any
fluctuation in the United States economy or the global demand for electronic parts will
result in a corresponding and magnified effect on the Singapore economy. As the Asian
markets start to regain its robustness after the 1997 Financial Crisis (regional GDP
growth rate reaches 7.5% in 2000 and 4.5% in 200 1)2, it presents a special opportunity
for Singapore to redefine its role in the new era, find innovative ways to lead the regional
economy, and reassess its future business missions. The goal is developing high valueadded businesses or services that not only will enhance Singapore's competitiveness in
the
2 1 st
century global economy, but also will be exportable to the surrounding regions so
as to capitalize on the growing regional economy, hedge the current dependence on the
two-way trade with the United States, and facilitate the emphasis put on the electronics
sector.
Engineering & Construction (E&C) services 3 are a feasible option for the aforementioned
goals, for they encompass technical prominence, exportability, stability, and growth.
Firstly, by demanding technical know-how and effective management, engineering &
construction services help develop technical savvy and other solid qualities in a nation.
Secondly, as historic data may suggest, matured engineering & construction services can
be successfully transferred to projects in foreign countries. Thirdly, since the duration of
engineering & construction projects are much longer than that of any economical cycle,
The United States rank first among all countries in two-way trades with Singapore. Year-to-year
breakdown is in Table 2.Od on page 20.
2 The Economist, The World in 2002, ed. Dudley Fishburn (London, UK: The
Economist Newspaper
Limited, 2001), 15.
3 Engineering & Construction services include procurement, planning, project finance, insurance, design,
management, operation and more.
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the industry dilutes setbacks resulted by the cyclical behavior of the economy. Lastly,
improvement in information technology and international trade are expected to raise the
standard of living and efficiency of residential, commercial, and transportation
infrastructures. Singapore can take advantage of this growth by securing a solid market
share in providing related E&C services. According to a World Bank estimate in 1996, an
expenditure of USD$1.2-$1.5trillion is anticipated for development in the region for the
next decade. 4 If engineering & construction services accounts for a reasonable 15% of
such expenditure, the capitalized market would represent roughly USD$200billion, which
certainly contains high upside potential.
1.1
Singapore's Competitive Advantages
Singapore is the most socially developed, politically stable, and financially sound citystate in the Southeast Asian region. By being the apparent leader in the region, it
commands high credibility in its exportable services. Also, since Singapore is more
developed than most Southeast Asian countries, it is in a position to provide those
countries with valuable planning and development experience when they undergo
economic or social transformation in the coming decades.
Singapore possesses the strong financial structure and jurisdiction system that can assist
its consultancy and contracting businesses. And its corporate culture and political
stability will certainly attract joint venture opportunities from most countries in the world
and help form strategic alliances among local firms.
1.2
The BOT solution
Build-Operate-Transfer (BOT) is a delivery and management method that, through
building and operating an asset, provides the Project Company with a long-term revenue
stream during and after construction. Take for example a toll road that is under a BOT
4 Asia Law, Asian Infrastructure Profiles 1997 (Hong Kong: Asia Law & Practice Publication Limited
Hong Kong, 1997), 230.
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contract, the Project Company will provide engineering & construction services during
the construction period. Then for a pre-determined period, or concession, it will operate
the infrastructure - providing maintenance and toll collection - before transferring the
asset to the control of the government.
With the correct business acumen, financial vehicles, and management technique - which
are all Singapore's strengths - BOT can bring about a steady income stream to the Project
Company. Being a value-transforming proposition, BOT also expands customers' focus,
that is, customers will no longer rely only on the conventional approach to provide them
with a product or service, but can look for a complete solution to their infrastructure
projects.
1.3
Objective
Two distinctive features of BOT are: 1) it produces a long-term revenue stream for the
Project Company; 2) it involves an extraordinary amount of duties to be performed by
different specialized parties.
The long-term revenue stream of BOT epitomizes what Singapore desires in exploring
new businesses, for it can utilize the services and management talents of Singapore,
dilute economic fluctuations, and provide a viable overseas market to Singapore. This
revenue stream, however, can be distributed among different players in the BOT
business; an appropriate scheme is required to maximize the benefits that go to
Singapore. Complexity implies there can be multiple forms in which Singapore can
appear in the BOT business. There is a need to define the niche Singapore wants to
capture and devise a corresponding strategic plan. These features map into two basic
objectives of this paper, which are (1) maximizing BOT's benefits in Singapore's socioeconomical model, (2) finding the appropriate strategies for Singapore to use itself as a
platform to launch international BOT projects in Southeast. Through this deliberate
effort, a foundation in the Singapore E&C field that is both high value-added,
professional, and exportable would be built.
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10
-
1.4
Approach
This paper will approach the context of Singapore-led BOT both internally and
externally. Section 2 will study the macro social-economical model of Singapore, the
opportunities and challenges faced by the city-state, and the importance of services to
Singapore's economy. Section 3,4 will analyze the construction business of Singapore
and study the organization of BOT, respectively. Section 5,6 will focus on the current
Southeast Asian market and incentives in implementing E&C services. Lastly, Section 7
will be the penetrating strategy on which Singapore should embark. Figure 1.0 is an
illustration of the paper outline.
Figure 1.0a - Paper Outline
I-
Section 2
Macro Model
Manufacturing
Services
Section 3,4
Other Services
E&C
Section 5,6
BOT
Others L eliveries
-Market
Volume
Section 7
y y
Strategy
- 11 -
-Market
Trend
2.0
Singapore - Challenges & Opportunities
Singapore is one of the Newly-Industrialized Countries (NIC) in Asia. There have been
researches tracing the reason, process, and path of its rapid growth. I.M. Little (1979) has
suggested seven general reasons such as location, size, colonial influence, and foreign
capital inflow that dictate the growth.5 Hofheniz & Calder (1982) believe that it is the
unique cultural and political factors that account for Singapore's growth. They claim as
Asian governments have little responsibility on wealth redistribution and social welfare,
tax rate is low and profits can be plowed back into building infrastructures. Haggard &
Cheng (1983) focus on the interrelationship among local, foreign, and state capital in the
development process. Crouch (1984) takes an innovative approach in stating it is the
"insulation" of the government from the middle-class and the working-class that allows
them to layout policies to serve as a foundation for business success. This paper,
however, will build on the "Technological Ladder Hypothesis" suggested by K.S. Goh
(1996). The hypothesis cites that the growth of a country follows a "Technological
Ladder". Various socio-economical factors such as investments only change the speed at
which a country climbs the ladder and the success it achieves at each rung; they do not
create the ladder, or a path of growth, as claimed by some theories.
Manufacturingof the Past
"Technological Ladder Hypothesis" states that developing countries will first grow their
labor-intensive industries because of the comparative advantage they can gain from
having low-cost labor. Singapore attests to such claim by first relying on trading and
labor-intensive, export-oriented manufacturing to sustain its economy in the early days of
independence. But by the late 1970's, it faced labor shortage due to raising demand for
labor and low growth rate of population and work force. As a result, industries were
forced to move from being labor-intensive to being capital-intensive. By requiring skilled
labor in production, Singapore's firms added a new barrier to entry and create market
differentiation. Hence, Singapore slowly transformed itself from a hub of trading and
5 The
seven factors are: 1) "Lucky in their circumstance", 2) smallness, 3) location, 4) colonial influence, 5)
foreign investment, 6) Vietnam War stimulated changes, 7) neo-Confucian values.
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12
-
labor-intensive
manufacturing
to
a
of
hub
export-oriented
capital-intensive,
manufacturing, or in terms of the "Technological Ladder Hypothesis", is moving from
the lowest rungs to the highest rungs.
Service of the Present
In the last decade, because of the changing world economy and competition in the region,
the capital cost of production became a concern to manufacturers. In addition, with the
increasing ease of technology transfer, other countries were catching up with the latest
technology quickly and Singapore faced a stark task in staying competitive. Increased
land cost, raised educational attainment, alongside with the large amount of services that
was in demand, introduced Singapore to become a hub of producing technology and
professional services at the same time. It can be viewed as a variation of the highest rung
in the "Technological Ladder". Services have accounted for more than two-thirds of
Singapore's overall production in the last decade, and its output has been climbing
steadily despite economic climate changes (see Figure 2.0a).
Figure 2.Oa - Performance of the Service Industry
100 4000
68%
90,000
7
C.
804000
"
70000
66%
060,000
6%.
60,000
-
40,000
-
30,000
I
Services Amount
Percentage
6%
63%
I
19901991199219931994199519961997199819992000
Time (Year)
Source: Singapore Department of Statistics
Despite higher output being posted, labor force devoted to services does not increase
proportionally, meaning productivity of the service industry has improved more
significantly than that of the manufacturing industry. For example, in the 1990's, a 65%+
- 13
-
of GDP came from services, while only 50%+ of the work force was performing services.
From Table 2.0a, one can see that the percentage of labor engaging in services has been
roughly constant across time.
Table 2.Oa - Employment by Sector in Singapore (% of labor force)
Industries
1966
1975
1984
1990
1995
Agriculture
Manufacturing
Construction
Transport & Utilities
Services
2.9
19.7
6.4
11.6
59.4
1.4
27.1
4.8
13.2
53.5
1.0
23.8
14.2
9.3
52.6
0.5
28.9
6.6
10.4
53.4
0.0
25.6
6.7
11.1
56.3
Source: Department of Statistics, Yearbook of Statistics Singapore, (various issues).
What drives the switch from being manufacturing-oriented to being service-oriented
besides capital cost aforementioned? It is indeed a necessary step for the growth for
Singapore. The causes of the transformation can be divided into "push factors" and "pull
factors".
Push Factors
Since manufacturing subjects to many uncertainties and external factors, it is
disadvantageous to Singapore's economy, which stresses stability and growth. Below we
will list three apparent disadvantages. First, production cost in manufacturing is very
price inelastic in a short run. Asset illiquidity makes the size of a factory unable to
instantaneously adjust to market conditions. Production can be halted and restarted on a
national level, meaning a series of firms may shut down during doormat years, then a
new series of firms will start when the market improves. On a firm level, however,
discontinuous production will result in many administrative issues and strategic
problems, such as the re-scaling of workforce, wage schedule, and production program.
Second, most manufacturing plants are supported by Foreign Direct Investment (FDI),
which, for instance, made up 70% of the total investment in Singapore in manufacturing
in 1997,6 and Singapore has little control over the management and investment of the
firms. FDI is normally aggressive and very sensitive to the prospect of the host country.
6 US
Department of State, (1999).
-14-
After the financial crisis in 1997, a portion of FDI has flocked due to the lack of
confidence in the region and weaknesses exposed by the crisis, yet another portion is
denied because of the new capital control mechanisms. In 1996 and 1997, FDI to
Thailand,
Malaysia, Indonesia, and the Philippines were USD$17.4billion
and
USD$16.lbillion, respectively. But in 1998, the amount dropped to USD$11.5billion.
Within the same period, Singapore's FDI decreased from USD$9.Obillion and
USD$8.lbillion to USD$5.5billion. 7 Effects of the financial crisis will be discussed in
section 6.3.2 The FinancialCrisisof1997 - Effect.
Lastly, manufacturers have to cope with the inventory adjustment process, that is, end
users need time to absorb the inventory temporarily stored at the middleperson. As a
result, even if a country has the comparative advantage in producing certain goods, there
is no guarantee that its product will have a constant demand. That helps explain why
Singapore's computer parts exports saw a double-digit decline right after the financial
crisis, despite global Personal Computer (PC) sales grew 7% in 2Q98 and 15% in 3Q98. 8
In system dynamics terms, the interrelation among FDI, functioning of manufacturers,
and demand are controlled by several external variables as explained before and a
reinforcing loop (labeled "R1 " in Figure 2.Ob on the next page) which represents the
dependence on FDI. And it is the reinforcing loop that makes the sector vulnerable and
unstable. For example, when global demand adjusts downward, the prospect of Singapore
drops and FDI stops flowing into the country. Plants have less resource with which to
operate and productivity decreases. With the loss of productivity and the competitive
edge, the outlook of the country looks even dimmer and FDI is withdrawn even more. In
short, the strength of the manufacturing sector is dependent on several uncontrollable
factors, and their high degree of interdependence collectively makes the sector very
vulnerable.
7
FDI is defined as the sum of equity capital, reinvested earnings, and intra-company loans by foreign firms
or their affiliates. Source: United Nations Conference on Trade & Development (UNCTAD), World
Investment Report (various issues); IMF, International Financial Statistics (CD-ROM).
8 Source: IDC, quoted in Accretion Asset Management, "Fund Manager's Report for November 1998,"
Accretion Asset Management, Singapore (1999).
-
15
-
Figure 2.Ob - System Dynamics Analysis of the Manufacturing Business
Manufacturer's ability
to make quick returns
FDI
FDI Inflow
Restriction
Low Price
Elasticity
Other Demand
(
e
tein
fnt
w
Manufacturers'
GGlobal
Demand for
***t
Inventory
Adjustment
Prospect of
Singapore
As far as the demand side of the market is concerned, in the age of global competition,
the world demand schedule is expected to be very price sensitive, that is, if one country
can produce a good cheaper than the others can, given the ease of international trade, that
country will gain a vast market share on an international level. In the past, companies
could survive by maintaining a regional market share because of market protection
mechanisms such as tariffs. But now, the market has expanded to the whole world and
firms are thrusted into fighting for the whole market. Given such fierce competition and
specialization, only few can survive in each sector.
At the same time, markets in Asia are becoming more integrated and focused. Firms no
longer have to locate their whole production line in one place, but can out-source the
production of different parts to different countries to gain comparative advantage. As a
corollary, countries will no longer produce assembled parts but only individual parts
which they have the advantage in production cost. For instance, Malaysia and Thailand
are strong at producing integrated circuits, while Singapore is the leader in disk drives
and computers. Table 2.nb below summarizes the difference between the old and new
business models:
-16-
Table 2.Ob - Changes in the Manufacturing Sector
Manufacturing Difference
Market
Sector Trends
Size
Before
* Location advantage
e International trade
Regional
& general
difficult
* All parts produced at one
place
Now
e No location advantage
e International trade easy*
Global &
focused
* Parts produced at
different places for
comparative advantage
Object of
Competition
No. of
Players
Market
Share of
assembled
parts
Many
survive
within the
general
sector
e Price
e Political and
Whole
Market of
individual
parts
Few
survive
within an
individual
sector
e Price
e Associated
Services
* Specialization
Winning
Criteria
historical
reasons
*Reduction of tariffs in recent years in selected Asian countries is listed in Appendix A-i.
What do these new trends mean to Singapore? They affect Singapore's manufacturing
structure in three ways:
1)
Labor cost
Singapore is surrounded by countries whose labor are much more exploitable. These
countries will provide fierce price competition, and due to their ample supply of cheap
labor, will also enjoy economics of scale over Singapore. According to a survey done by
the United Nations Industrial Development Organization in 1990, in terms of unit labor
cost of manufacturing, Singapore is 12% higher than Thailand, 32% higher than
Philippines, 18% higher than Malaysia, and 58% higher than Indonesia.9 And in a recent
interview (2002) with the National Trade Union Congress (NTUC) Deputy-General Lim
Boon Heng, he believes the labor cost in China is about just one-tenth of that of
Singapore, and unless workers in Singapore are willing to take a paycut, it is hard for the
city-state to keep firms from leaving.' 0 Relocation of firms becomes even more prevalent
right after the financial crisis, because when the Asian economies started anew, it gave
firms an excellent opportunity to restructure their regional operations.
9 The World Bank Group, Papers for Labor Markets in the East Asian Crisis Project: World Bank Seminar
on the Economic Crisis in Employment & Labor Markets in East and South-East Asia (Bangkok,
Thailand: The World Bank, 2000).
10 Sing Tao Newspapers Hong Kong, "Singapore Union Encourages Lowering of Salary to Keep Jobs
(Translation)," Sing Tao Newspapers Hong Kong, Daily Magazine, 18 June 2002, A-17.
-
17
-
2)
Land cost
When the manufacturing sector becomes more focused and fickle, the use of land will
change frequently at the same time. For instance, when an accessory of an old product is
being invented, other countries can simply initiate a new line of factories in the
surrounding area to produce the accessory to support the original product, but at
Singapore, given land is at a premium, it does not enjoy such flexibility. As a result,
wherever the leading product changes in Singapore, it will generate ripples of strategic
issues in land use. Inevitably, the fixed cost of running a manufacturing plant in
Singapore will be higher than in the other countries.
3)
Revenue
The current emphasis on the sales of competitive goods such as electronic parts is going
to lead Singapore's exports to experience heavy fluctuations because of the "winner takes
all" mentality. Take Singapore's export growth for example, from 1997 to 2002Q1, the
average growth is around -0.6%."1 The standard deviation, however, is about 12%, and
the maximum and minimum entries are 20.3% and -12.1%, respectively. It attests to the
claim that the world's demand schedule is very price sensitive and the demand for
Singapore's product is very much affected by its price relative to those of the other
countries.
Pull Factors
As 93.5% of Singapore's population at age 15 and above can read and write, and
enrollment rate in tertiary education reached 18%+ in the late 1990's, Singapore has a
highly educated labor force.' 2 In addition, it has a sound business infrastructure and
bureaucracies as well - the city-state is the 4th least corrupted economy in the world,
according to the study "2001 Corruption Perceptions Index" done by Transparency
International. 1 And Singapore's legal system has long been known for its completeness
and sternness. Hence, Singapore's talent will be best utilized in performing business and
" Export growth of Singapore is -0.2%, -12.1%, 4.5%, 20.3%, -11.7%, -15.3% from 1997 to 2001, plus
02Q1. Source: Singapore Department of Statistics; Monetary Authority of Singapore.
12 Central Intelligence Agency, The World Fact Book 2001 (Washington, D.C., United
State: Central
13
Intelligence Agency, 2002); Department of Statistics, Yearbook of Statistics Singapore (various issues).
Transparency International, "(Untitled)," Transparency International Press Release, 27 June 2001.
-
18
-
professional services, for they can enjoy market differentiation created by Singapore's
skilled labor force and developed social systems. On the contrary, industrial activities
compete only on the availability and price of land and labor, which Singapore cannot
prevail on consistent basis. Therefore, the shift from goods production to services
production is both necessary and beneficial to Singapore.
Trading
The aforementioned push and pull factors address the question why Singapore should
explore on services from a strategic perspective. Now we will address the same question
from a trading perspective. Exports play a more important role in Singapore's economy
than it has been in other countries, as it is displayed in Singapore's high exports to GDP
ratio relative to that of the others (see Table 2.Oc below).
Table 2.0c - Ratio between Exports & GDP in Asia
Population (2000)
Regional Economies
China
Hong Kong
Indonesia
Japan
Malaysia
Philippines
Singapore
South Korea
Thailand
Exports as %
1,261.8 million
7.1 million
224.8 million
126.5 million
21.8 million
81.2 million
4.2 million
47.5 million
61.2 million
Exports as %
of GDP (1999)
of GDP (2000)
19.7%
109.5%
34.5%
9.6%
107.3%
47.9%
135.0%
35.6%
44.8%
4.1%
107.6%
7.9%
14.0%
36.7%
12.4%
116.3%
23.0%
15.2%
Source: CIA, World FactBook, (2000); IMF, International Financial Statistics, (1999).
Singapore's biggest trading partners are Malaysia, Japan, and the United States. Table
2.Od on the next page lists the trading figures of the latest years:
-
19
-
Table 2.Od - Singapore's Trading Figures & Partners
Amount
US
Malaysia
Japan
EU
(USD$bn)
2000
1999
1998
1997
1996
Hong
Kong
Exports
Imports
Exports
Imports
Exports
138
135
194
188
110
17%
15%
19%
17%
18%
17%
16%
16%
7%
17%
7%
17%
13%
11%
15%
13%
8%
N/A
8%
N/A
Imports
102
17%
15%
15%
11%
13%
5%
Exports
Imports
Exports
Imports
133
125
131
125
13%
10%
11%
5%
14%
12%
12%
5%
13%
16%
13%
16%
Source: U.S. Commerce Department; US Department of State; International Trade
Administration; Singapore Trade Development Board.
Though Malaysia commands a high percentage of Singapore's total trade, a large portion
(varying from 30% to more than 50% from year to year) of Malaysian imports, mainly
integrated circuits and data processing machines, are being re-exported back to Malaysia
after refinement.14 European countries as a whole trade extensively with Singapore, yet
the market is relatively fragmented. Therefore, in terms of domestic exports, the United
States is the biggest and the most important market. Singapore's domestic exports to the
United State are, after all, very focused. Among exports, around 80% are machinery /
electronics in the early 1990's, and the representation of machinery still maintains more
than 70% in recent years.15 But the dominance of electronics / machinery has been slowly
diminishing since 1997, largely due to Singapore's deliberate effort to explore on hightech, technology-intensive industries such as biotechnology and digital media. For
example, exports of chemicals have been steadily growing from less than 2% of the total
Singapore-US trade in the early 1990's to almost 8% by 2000. Figure 2.Oc on the
following page shows the degree in which machinery and chemicals contribute to exports
to the United States.
1
15
For example, the percentage of Malaysian imports being re-exported to Malaysia is 56% for 1999 and
58% for 2000. Source: Singapore Trade Development Board.
For different commodity breakdown, see Appendix A-2. Source: United Nations, World Commodity
Trade Statistics, (various issues).
-
20
-
Figure 2.Oc - Machinery & Chemicals as % of Total Trade with US
15%
80%
-u-Machinery
-- +-- Chemicals
77%
12%
S74%
14w
~71%
*
'
,6%
3%
68%
0%
1
66%
1997
1998
2000
1999
Time (Year)
2001
2002
Source: US Census Bureau, Foreign Trade Division, Data
Dissemination Branch.
Singapore's close business relations with the US generates not only prosperity, but also
vulnerability, because the demand of the US on Singapore's product will largely
determine the revenue of Singapore. Yet the biggest problem is that even if demand
expands in the US, there is no guarantee that the US will demand more goods from
Singapore.
For
example:
though the
total
amount
of exports
to
the
US
(~USD$135billion/year) and the percentage of them being electronics (-70%) has not
changed much from 1996 to 2001, the market share won by Singapore in the US
electronics market eroded from 12.1% to 6.1%.16 Indeed, the same marketing problem
exists in all countries that trade with Singapore. However, having one country
representing such a large portion of its domestic exports, magnifies the problem and
commands attention. Diversification of product type, diversification of trading partners,
enhancing trading relations, and exploring new business opportunities are all possible
option in hedging the current leverage on the Singapore-US trade. Exporting E&C
services to Southeast Asian countries will be the option evaluated in this paper.
16
US Department of Commerce; United Nations Comtrade Database.
-21-
2.1
Challenges
Singapore's location brings about both prosperity and challenges. Singapore is located at
the Strait of Malacca and is one of the most important shipping centers in the world; the
Port of Singapore led the world in shipping tonnage in 2001 by recording 960.1 million
gross tons.' However, being a small city-state surrounded by sea also makes Singapore a
net importer of energy and fresh water. The import of energy and water, alongside with
the need of human capital and land for growth, become elements so critical that their
shortage will affect the performance and stability of Singapore.
2.1.1
Energy1 8
Singapore's energy source depends mainly on imported oil and natural gas. The import of
oil and natural gas are estimated to be in the magnitude of 580,000 barrels of oil per day
and 53 billion cubic feet of natural gas per year (1998), respectively. The city-state does
not import or export electricity. With the majority of energy being imported, standard of
living as well as production cost will likely be affected when the price of energy
fluctuates.
Gas
Singapore currently imports 155 million cubic feet per day (Mmcf/d) of natural gas from
Malaysia. Due to this heavy dependence on a single source, Singapore has embarked on a
diversification strategy. In January 1999, the Singaporean gas consortium, SembGas,
signed an agreement to purchase 325 Mmcf/d of natural gas over the span of 22 years
from Indonesian state energy company Pertamina. Another contract was signed in
September 2000 for supplies to PowerGas from Pertamina. This 20-year contract calls for
supplies of 150 Mmcf/d to begin in 2003, eventually rising to 350 Mmcf/d. The idea of a
regional gas grid for members of the Association of Southeast Asian Nations (ASEAN)
1
18
Maritime and Port Authority of Singapore, (2002).
Section draws on reports by CountryWatch.com, www.countrywatch.com, quoted in website directory
Yahoo!® Finance, and by Energy Information Administration (U.S.) website, www.eia.doe.gov. Unless
otherwise noted, all figures are in 2001.
-
22
-
has been under discussion for several years, and international links already exist or under
construction are between Burma and Thailand, between Malaysia and Thailand, and
between Indonesia and Singapore.
2.1.2
Water 19
From 1985 to 1990, Singapore's annual water consumption increase was 3.3% per year,
but from 1990 to 2000, the figure jumped to 4.6%. Currently, Singapore imports water
from Malaysia under two agreements: a 1961 contract gives Singapore rights to extract
86 million gallons of water per day (mgd) from Mount Pulai and the Tebrau and Skudai
rivers; and under a 1962 agreement, Singapore can draw up to 250mgd from the Johor
river and Linggui reservoir. Together, they satisfy 52% of Singapore's daily water
demand.
The 1962 agreement, however, ends in 2061, and the 1961 deal expires in 2011.
Building more reservoirs is not possible in land-scarce Singapore and damming the sea
between islands wouldn't provide an area big enough for rainfall collection. Two options
being considered are buying water from Indonesia and desalinating seawater. In 2001,
Indonesia agreed to complete a proposal on how to supply Singapore with water by
2002.20 While the potential supply is huge, the cost of the infrastructures will be
enormous. The current cost of water is estimated to go up by five to eight times per cubic
meter (Mozi, 1994). The second option is desalination Singapore's limitless supply of
seawater, the downside being its high consumption of energy. Preliminary estimates
suggest that desalinated water could cost seven to eight times more than current
supplies.2 1 Even though both options appear very costly, they are still cheaper than the
15-fold increase in water cost demanded by Malaysia in negotiating a contract extension
19 Azra Moiz, "Singapore - Running out of Water," TimeNet Asia (1994), quoted in website,
http://worldwaterconservation.com/Singapore.html, and Stephan Helgesen, "Water Conservation &
Recycling Systems." United States: U.S. & Foreign Commercial Service & U.S. Department of State,
1999.
20 Source from a news release of Associated Press by Acting environment minister Lim Swee Say on 6
November 2001.
21 Public Utilities Board, Singapore,
(1995).
-
23
-
after 2061, which in turn will cost Singapore an additional USD$11.8million per year.22
In short, obtaining reliable and cheap water supply can be a high priority and tough
challenge for Singapore.
2.1.3
Human Capital
Singapore's demand for skilled workers has always been strong because of its emphasis
on professional, high value-added services. As a result, a large effort is put on improving
education of the population. The annual expenditure on education has maintained above
18% of the total government expenditure since 1990,23 and the enrollment rate of tertiary
education has reached 18% by 1995, with 50%+ of the students being engineers.2 4
Nonetheless, there are problems associated with a highly educated labor pool. The first
problem is the utilization of talent. As workers are more qualified, firms have to improve
on their wages and the economy at-large has to create more openings to employ the
workers, or Singapore will face a high unemployment rate with talented workers
underpaid. The second problem is striking a balance between the supply and demand of
talent. Ideally, the growth of the job market should be relatively close to that of the
educated work force, otherwise, human capital deficit or surplus will occur. But given the
global economy changes so rapidly, the degree in which Singapore can control its
educated-labor demand is lower than before. Since skilled professionals cannot be
generated in a short run, when Singapore prospers, Singapore cannot produce
professional talent instantly and have to import from the surrounding regions.
2.1.4
Land
Associated Press, 6 November 2001.
Statistics Division, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
24 Gerald Tan, ASEAN: Economics Development and Cooperation,
2 nd ed (Singapore: Time Academics
Press, 1997), 162-163.
22
23
-
24
-
The total area of Singapore is about 647.5 sq. kilometers. About 50% of it has already
been developed. According to the ASEAN Association for Planning & Housing (1998),
land use 8f Singapore is as follows:
Table 2.1.4a - Land Use of Singapore
Type
Area (Sq. kilometer)
Built-up Areas (Industrial & Commercial)
Farms
Forest
Marsh and Tidal Waste
Others (open spaces, parks, unused land, military establishment, etc.)
Total
Source: ASEAN Association for Planning & Housing, (1998).
321.6
10.8
28.6
15.5
271.0
647.5
Though land distribution data may be available, area distribution data between industrial
and commercial use has been difficult to obtain, because the two have very different
floor-to-area ratios (FAR). For example, 100,000 sq. feet of commercial space will
correspond to a slender office building, but 100,000 sq. feet of industrial space will
correspond to a factory that requires roughly 100,000 sq. feet of land, for factories
function on horizontal instead of vertical space.
The optimal land distribution between services and industries should base on the degree
in which technology affects communication cost and production cost of both sectors.
Given the current development in technology, and the higher floor-to-area ratio of
services, the cost-optimal distribution should favor services in a long run. Moreover, just
as we have argued in section 2.0 Singapore - Challenges & Opportunities, global
competition is going to pressure Singapore's manufacturing
sector because
of
Singapore's high land cost. But land scarcity may eventually hinder the expansion of
other sectors as well.
Conclusion
The rarity of different indigenous resources brings about different challenges to
Singapore. Energy and water scarcity create dependence on other countries, whereas
human capital and land scarcity impose constraints on growth. They all link together in a
-
25
-
way that they ultimately determine the competitiveness of Singapore on the global level.
For example, if water becomes expensive, industries suffer from a higher production cost
(industrial use of water account for 53% of the total use, and factories are being charged
at USD$0.71 per cubic meter of water used).25 In order to stay competitive, Singapore
has to lower either its rent or wages to reduce operating cost, but such moves will create
havoc in the labor and real estate markets. Or in another case, if the demand for
Singapore's professional services increases, since labor supply is inelastic, in order to
meet the demand, wages have to go up. With cost raises, the demand schedule adjusts
downward and the growth in employment halts. All in all, the ultimate challenge faced by
the Singapore government is striking a balance amongst many macro variables such as
growth, employment, living standard, international competitiveness, availability and price
of resources.
25
Stephan Helgesen, "Water Conservation & Recycling Systems." U.S. & Foreign Commercial Service &
U.S. Department of State, 1999.
-
26
-
2.2 Opportunities
It is evident that the socio-economical model of Singapore is undergoing severe changes
resulted by the Financial Crisis of 1997, the burst of the Internet bubble in 2000, and the
emergency of the surrounding economies. Structural adjustments in employment pattern
have already taken place. Since the Internet meltdown in 2000, unemployment generated
by the closure of factories has reached more than 12,500. Unemployment rate goes from
3.4% in early-2000 to 4.5% in mid-2002. 2 6 Though reducing production cost and
focusing on producing higher-end technology can help sustain the export-orientation
paradigm and keep industrial employment for an extra couple of years, they cannot be a
long-term solution to the fundamental problems. Changes in employment structure, plus a
relatively small domestic market (a population of 4 million), urge Singapore to promote
an overseas expansion strategy that sells services overseas and generates employment at
home, just as export-oriented industrialization has done to industries before.
Fortunately, this process is expedited by the advent of information technology. With the
ease of exchanging ideas and delivering end products, services of a whole supply chain
can be provided via the same agent to reduce the problem of integration, and be launched
at a remote location for the selection of the most qualified team. This "Complete Supply
Chain Solution" approach creates a new niche for Singapore, which can take on a more
active and all-encompassing role in the new Southeast Asian economy, because
comparing to its regional peers, it possesses superior business acumens, banking and
legal systems, and management abilities; and comparing to foreign competitors, it
possesses unmatched familiarity with the Asian countries and understanding of the
market. Figure 2.2a represents graphically the possible role change of Singapore.
26
Maxtor Peripheral, Seagate Technology, and Western Digital alone dismissed more than 9,000 workers
in 2000 and 2001. Source: Sing Tao Newspapers Hong Kong, "Singapore Union Encourages Lowering
of Salary to Keep Jobs (Translation)," Sing Tao Newspapers Hong Kong, Daily Magazine, 18 June 2002,
A-17.
-
27
-
Figure 2.2a - The Relationship between Client and Services Providers
Client
Se
'e
ation
Inte ati
Country 2
Counr
-
Before:
Singapore and other countries act as satellite service providers
Low degree of coordination among service providers
Singapore's role is limited and passive
Clients wastes resources on integrating services (A circle encloses client's
responsibility)
/0,
Client
Srvic
Srvic
Country 2
Counr
Now:
ice
- Singapore and other countries act as satellite service providers
- Singapore can be the client representative. Singapore's role expands: integrates
services for client
- Clients less troubled by the large number of services types (A circle encloses
client's responsibility)
In this paper, we will investigate the way in which Singapore can apply the ideals of
Complete Supply Chain Solution and offshore service providing in the E&C field using
BOT as a vehicle. According to a World Bank estimate (1996), there will be a USD$1.22
$1.5trillion worth of construction in Southeast Asian in the next decade. This large
potential, plus Singapore's developed service sector, in conjunction with improved
information technology, present to Singapore a unique opportunity to bring its overseas
expansion regime to the E&C field, and make the program a driver for Singapore in the
next century.
27
Asia Law, Asian Infrastructure Profiles 1997 (Hong Kong: Asia Law & Practice Publication Limited
Hong Kong, 1997), 230.
-28
-
3.0
Self Assessment
3.1
Singapore's Social Structure & Construction
Ever since Singapore secured independence in 1959, the Singapore government has led
the city-state undergo drastic social and economical changes: restructuring in grassroots
political party, coordination of government agencies, improvement in education and
more. As Yeung, a Transnational Corporations Specialist at the National University of
Singapore, puts (2001), "One distinctive feature of Singapore's urban competitiveness is
that it is very much a city (in a territorial sense) coupled with a strong nation-state (in a
institutional sense); a state with powers far beyond those of any local state. To an
unparallel extent in Asia, the city-state has relied heavily upon developmentalism to
legitimize its political power and control."2 8
Two of the main development themes are public housing and urban renewal projects,
which bring about a large demand for construction. But as of today, most of the land has
been developed, and since most buildings are relatively new, Singapore has not grown
enough in the recent past to encourage depleting them and constructing a new generation
of buildings. Thus, new construction is limited to hovering around the sum of
replacement rate and natural growth rate. This social phenomenon binds the growth of
Singapore construction firms in both size and functionality, as Building and Construction
Authority (BCA) Chairman, Chen Charng Ning, says (2002), "The local market is
overcrowded with mid-sized companies, many of which rely too heavily on housing
estate projects." Chen emphasizes that one key to the industry's long-term survival is
consolidation. 2 9
Singapore has taken a hard hit in construction in recent years. Both employment and
revenue suffer. In 1999, among the 281 company liquidation cases, 62 of them were
Yeung, Henry Wai-Chung & Neil, M., co-editor, World of E-Commerce: Economic, Geographical and
Social Dimensions: "Grounding Global Flows: Constructing an E-Commerce Hub in Singapore"
(Chichester, England: John Wiley & Sons Ltd, 2001), 146.
29 Jane's Asian Infrastructure Monthly, "Singapore's construction demand forecast to rise by
over 32%,"
Jane's Asian Infrastructure Monthly, 18 January 2001.
28
-
29 -
construction companies. 30 It was the second highest number among industries
(commerce). In 2001, industry-wide revenue diminished by 2.1%, certified payments
dropped by 4.6% due to weak property market sentiments while total contracts awarded
suffered a substantial decline of 39%, all on year-to-year basis. All these changes are in
addition to the 33% and 3% industry-wide decline that occurred in 1998 and 1999.3'
Demand for both public sector and private sector construction decrease due to cutbacks in
Housing Development Board (HDB) flats, the softening of the private property market
and fewer industrial developments.32 Despite these negative indicators, many believe
ongoing projects such as Punggol 21, the Estate Renewal Strategy in Toa Payoh, Ang Mo
Kio and more, the main & interim Upgrading Programs, and the Selective En-bloc
Redevelopment Scheme in 2000 will support construction growth in a long run.
The Dynamic Propertiesof Construction
The level of construction is a dynamic product and is dependent on buyers' collective
expectations. The following sub-section will be devoted to elaborating this argument and
from it generalize several trends in the Singapore construction market. A logical
projection of the construction market is vital to our study because, firstly, performance of
the construction industry will directly affect that of E&C services; secondly, internal
supply and demand of E&C services will affect the capacity and availability for external
BOT projects. In order to make a rational projection of the future construction market, a
simple model will be built. The model will base on the following assumptions: 1) the
commercial sector and residual sector of real estate both lag the economy, 2) construction
lags real estate; 3) the level of construction is "Mean Reversing". The proofs of these
assumptions are as follows (data used can be found in Appendix A-3):
1)
Real estate lags the economy
OECD, Insolvency Systems in Asia: An Efficiency Perspective "Country Report For Singapore" (Paris,
France: OECD, 2001), 349.
31 HorKew Corporation Limited, "Industry Overview," article posted on www.WallStraints.com,
(2001).
32 The public sector, which accounts for more than half of the total value of contracts
awarded, is supported
mainly by HDB projects. Channel News Asia, "Economic Survey Singapore 2001". Channel News Asia,
2002; HorKew Corporation Limited, "Industry Overview," article posted on WallStraints.com, (2001).
30
-30-
Since office spaces are mostly rented in the form of leases, tenants cannot move out of an
office in a matter of weeks, or months, based merely on the economy, but are given the
option to leave only upon a finished lease. When the economy suffers and companies
downsize and look for smaller offices, most leases are not renewed. Table 3.1b depicts
the correlation between unemployment and office vacancy since 1997.
Table 3.1b - Unemployment & Office Occupancy
Unemployment Rate (%)
Year
1997
1998
1999
2000
2001
2.4
3.2
4.6
4.4
3.4
Source: Singapore Department of Statistics.
* Calculation based on year-average values.
Change (%)
0.6
-0.8
-1.4
0.2
1.0
Change in Occupancy (%)*
-2.8
-1.6
5.1
-2.4
As one can see, when unemployment hiked from 1997 to 1999, office occupancy
dropped. In 2000, when the economy briefly rebounded and unemployment rate came
down, companies absorbed a large amount of cheap office space. Occupancy increased
by more than 5%. The lag generated by the leasing format helps explain why the negative
effect of the financial crisis was not fully felt until almost 2 years later. From Figure 3.1 a
on the following page, one can see that office occupancy had been gradually decreasing
since 1997. Nonetheless, not until 99Q2, had office vacancy reached its highest postcrisis level at 13%. Vacancy generated by corporate downsizing is even more severe in
Singapore, as the city-state is small enough that migration cost is low and close
substitutes among office spaces are abundant.
-31 -
Figure 3.1a - Occupancy Rate vs. Price Index
96
160.0
94
140.0
-20.0
92
90
>1Y
-- 80.0
=388
-- 60.0,
*
6 -
---
o 84
02
I
I
Occupancy Rate*
40.0
Ofice Price Index
20.0
II
I0.0
CL
1
97Q2 97Q4 98Q2 9804 9902 99Q4 0002 00Q4 01Q2 0104
Time
The upward swing of office demand also lags the economy, but with a shorter time
differential. Recall that for a company to exit an office space, it has to wait till an old
lease expires. Similarly, a company has to wait for an office space to be available to
move in. But during the early period of a recovery, vacancy rate is normally high and
space tends to be cheap resulted by the previous recession. Therefore, companies can find
new, affordable spaces easily, and can afford to absorb a lot of them. Moreover, office
space supply during a recession is normally low, as a result, when the economy rebounds,
there will not be enough supply in the pipeline to satisfy demand. In the case of
Singapore, office space occupancy experienced a sharp spike in the second half of 2000,
when the economy underwent a sudden leap: GDP growth jumped from 5.9% in 1999 to
9.9% in 2000." As suggested, the time lag between the economy and office space
demand is almost negligible in a rebounding scenario. Also, occupancy jumped a higher
percentage than price did over the early recovery period (00Q2 to 01Q2), which attests to
our claim that supply indeed decreases during recession. 34
3
3
Asian Development Bank, "Asian Development Outlook 2001 Update," Asian Development Bank online
publications. 2002.
According to data released by Urban Redevelopment Authority (URA), office space supply (in 1,000 sq.
feet) for 1996 is about 250, 1997 is 350, 1998 is 230, 1999 is 150. See Appendix A-4 for deduction logic.
-32-
The residential market also follows the economy but has a tendency to follow it closer
than the commercial market does, because residential housing requires less time to
construct and thus will adjust to the market demand better. For example, residential
vacancy in Singapore fully felt the negative impact of the financial crisis in 98Q2 (see
Figure 3.1 b). Compare to the case of commercial building, residential real estate hits the
minimum almost one full year ahead of commercial real estate does.
Figure 3.1b - Occupancy Rate vs. Price Index
93.5.
180
93.0
160
92.5--
92.0--
140
91.5
~'91.0C.
CY
90.5
100
90.0
89.5-89. 0--
R
88.5
(L
ccupancy Rate
sidential Price Index
.80
I
.60
I
I
9702 9704 98Q2 9804 9902 99Q4 0002 00Q4 01Q2 01Q4
Time
Similarly, as the weakened economy temporarily rebounded in 1999, residential vacancy
dropped almost 17% (from 9.6% in 98Q2 to 8% in 99Q4). This number indeed matches
the GDP growth rate over the same 2-year span, which was around 16.5% from 1998 to
2000.
2)
Construction lags real estate
Since most private sector construction in Singapore are housing development projects,
private sector construction spending and housing demand are highly co-related. From
Figure 3.1c, one can see that occupancy rate moves just slightly ahead of private sector
construction, except in 2001. The main reason for the irregular behavior in 2001 is that
since construction suffered in the previous years, supply dropped and routine absorption
was sufficient enough to keep the occupancy rate high.
-33-
Figure 3.1c - Residential Occupancy Rate & Private Sector Construction Growth Rate
94 .
1 150
0
0)
93
-100
0
-50
0
-0
2- -R
4-.
>1
U
92
C
0.
U
U
91
a
-- 00
90
C
Co
El
Occupancy Rate
-
El
~0
-Construction
89
Growth
88
-150
200
97Q2 97Q4 98Q2 98Q4 99Q2 99Q4 00Q2 0004 01Q2 01 Q4
Time
3)
Mean Reversion of Construction
Construction possesses a mean reversion property. We will first verify our assumption
using data of the past ten years, then explain the claim using logical arguments. First, we
regress each quarterly awarded contract amount against the previous one. This operation
helps us understand if there exists a time-serial correlation between successive quarters in
term of contract amounts. The finding is a surprisingly low time-serial correlation among
consecutive quarters (see Appendix A-5 for regression results). Construction, nonetheless,
does possess long-term tendencies. A counter-intuitive and interesting result is found if
we plot construction level over time. It appears in a 10-year span, the construction level
of Singapore follows a periodical cycle that has a period of about 6 years and a mean
value of about S$4,500million per quarter. Whenever the level of construction is
higher/lower than the mean value, it has a tendency to return to the mean (see figure 3.1 d
on the following page).
-
34
-
Figure 3.1d - Quarterly Contract Amount vs. Time
_
9000E6000 7000 -
5000 4000 -
2000 1000
a
1992 19931994 19951996 1997199 1999200020012002
Time
Source: Building & Construction Authority of Singapore (BCA)
website, www.bca.gov.sg.
This "Mean Reversion" can be explained by the change in supply and demand. Whenever
capital asset demand is higher than the mean value, the price of land increases. Upon
witnessing an increase in land value, orders of construction flow in. When one uses the
Price Index indicator of Urban Redevelopment Authority, and plot the time dependence
of both the index and contract amount over the last decade, one will find an astounding
correlation between land price and construction. Regardless of the direction of the trend,
price always drives construction (see Figure 3.le).
-35-
Figure 3.le - The Relationship between Price and Construction Level
9000
220
8000
200
7000
180
g
160
4)
6000
4C
5000
V
-0140
3000
200
m Construction
*Price Index
1000
0
80
60
1993
1994
1995
1996
1997
1998
1999
2000
2001
Time
Source: Source: Building & Construction Authority of Singapore
(BCA) website, www.bca.gov.sg; Urban Redevelopment Authority
Releases Quarterly Real Estate Information.
Since new buildings require time to construct, price of land will remain high until a new
series of buildings becomes available. By when they eventually become part of the
supply, the market-clearing price will have to adjust to a level lower than before. Upon
seeing land price plummets, investors become pessimistic and stop ordering new
buildings. Since supply halts for a certain period, the level of existing stock decreases.
Land price then increases due to the lack of supply. The same pattern repeats itself and
forms the mean reversion trend.
Mean Reversion Createdby Government Spending
Another factor that supports the mean reversing behavior of construction is that
government spending increases when 'construction struggles. In Singapore, public sector
construction kept pace with private sector construction when the latter performed
strongly in the early 1990's. Then in 1998 and 1999, it is evidenced that when the private
sector started to weaken, public spending maintained its normal level to protect the
industry. And when the private sector still did not improve in 2000 and 2001, the public
sector introduced several large contracts to keep the industry afloat. (See Figure 3.1 f.)
-36-
Figure 3.1f - Public & Private Contract Sum
7000
7000
- 6000 CI)
6000
50005000
-
- -
Private Sector
Public Sector
E
-4000
4000
49U
*
Z~
$
0
3000 -3000
.
*~
2000 -A
1000
r:
1
0
000
1993 1994 1995 1996 1997 1998 1999 2000 2001
Time
Source: Building & Construction Authority of Singapore (BCA) website,
www.bca.gov.sg.
Government spending has been an important regulator in Singapore's economy as well as
construction industry. When the economy struggles, private firms would have less money
to build infrastructures, thus private sector construction drops. In this case, the
government will intentionally increase public sector construction as a economic stimulus.
When the economy and private sector spending are solid, government-supported
construction will only be the amount needed to aid private sector growth.
Model Formulation
With the aid of the above analysis, we can formulate a model on the construction industry
of Singapore. Recall in the first assumption that real estate demand lags the economy. In
modeling terms, we let the economy and the lag be exogenous elements controlling the
demand for real estate. The demand for real estate, and the current supply of assets,
together will determine a market-clearing price for assets. And as discussed in
assumption two, this market-clearing price will be the driver for new construction. New
construction turns into asset after a lag and with the support of E&C services. Lastly, as
mentioned in assumption three, the Singapore government has created construction when
the market struggles, and we will take this point into account by adding a corresponding
source to the inflow to construction. Figure 3.1 g is our completed model.
37-
Figure 3.lg - Model of Singapore's Construction Industry
Land
Price
Time Lag
Time Lag
Asset
spl
C74
Construction
Time Lag
Real Estate
Demand
(C
Government
Spending
E&C
Services
Depletion
Economy
Implications
Mixed messages are sent by the model. On the bright side, the present time is located at
the bottom of the generic construction cycle. It means the price of construction has
reached a level so low that new orders should be attractive. There are strong historic
trends that the market is mean reversing. The possibility of having a rebounded market in
2 to 3 years is high.
On the dark side, however, couple concerns have clouded the prospect of the industry.
First, there is no indication that the economy is going to revive strongly in the immediate
future. Second, a large portion of the current construction is generated from government
spending at the beginning of 2000, but not from the natural growth of market demand. If
we apply these two trends in our model, the following will occur: 1) Construction, as well
as E&C services, will boost at the beginning due to the shock brought about by
government spending. 2) After several periods, new buildings turn into part of the
existing assets and asset supply rises.
-38-
Figure 3.1h - Model of Singapore's Construction Industry (Simulation 1, start with bolded entry;
disregard dotted lines in this step)
Time Lag
Time Lag
Land
Price
Asset
Construction
P
()Supply
Time Lag
\
s% --------- ,
Real EstateSpnig
Demand
Government
E&C
Services
ercs
I
Depletion
Spendig
---------
3) But since this positive construction shock is not supported by the growth of demand,
new supply will exceed demand and drive down land price. 4) As land price is not
attractive for development and government spending discontinues, construction falters
and E&C services is negatively affected as well.
Figure 3.1i -
Model of Singapore's Construction Industry (Simulation 2, start with bolded entry;
disregard dotted lines in this step)
0
LandLand
Price
Time Lag
Time Lag
+
Construction
Asset
Time Lag
Real Estate
S
Demand
Go ent
nt
E&CDelto
Services
Depletion
0
Since major government spending took place in 2000 and GDP growth rate dropped in
2001, based on the feedback effect stated, the next couple years will be tough for
Singapore's construction as well as E&C services industries. Long-term solutions may
-39-
involve natural adjustments over time, or an overhaul of Singapore's business model. As
for immediate remedy, Singapore can export excessive E&C services overseas. If
Singapore's domestic construction slows down in the coming years, E&C services will be
underutilized as a result. It is indeed an excellent time for Singapore to explore on BOT
operations while E&C services have not yet been weaken by structural employment
changes. Once talents have left the field and domestic construction starts to improve, the
industry will have difficulty replenishing E&C services domestically and exporting E&C
services to foreign BOT projects. Moreover, newly joint personnel may not have acquired
the experience that is needed for large-scale construction projects. So from an availability
and talent standpoint, it carries a positive value in developing BOT in the coming years.
Also, since Singapore's domestic construction market is so small and dependent on few
types of projects, E&C services can hardly be developed into an industry with a
consistent demand. Demand for construction fluctuates and it makes the price of E&C
services fluctuate also. Since price is linked to wages, professionals in the field are forced
to come and go depending on market conditions. If E&C services are exported in the
form of BOT, not only that the market expands to other countries, but also that the
concession format of BOT will bring about a stable demand for E&C services. With E&C
services in constant demand, the industry will have the potential to flourish. Better
efficiency and lower cost may result, and may eventually benefit Singapore's domestic
construction business.
-40
-
4.0
The BOT Solution
4.1
Background of BOT Solutions
Build-Operate-Transfer (BOT) is a project delivery method in which the Project
Company is responsible for financing the project, building the structure, and operating it
for a predetermined period of time before overturning the asset to the supervision of the
host government. Unlike traditional Design-Bid-Build, or other short-track deliveries, in
which multiple entities perform only services on behalf of an owner, BOT needs the
Project Company to manage and operate the infrastructure as well. BOT is best applied in
developing countries which are in need of infrastructures but cannot finance them on
their own. Through using BOT and the financing ability of private organizations, these
developing countries can enjoy great social and economical benefits without assuming
much of the financial and operational responsibility. BOT has the following advantages
as well: 1) private companies are normally more efficient in managing an operation
because of their less bureaucratic approach to business; 2) private companies can finance
a project much easier than the government does, for they do not have to justify their
investments to the public which carries multiple interest groups. They, therefore, can
finance a larger sum in a shorter period than the government can; 3) private firms tend to
fulfill the goals of the program and start serving the public earlier, because not only that
they have a more robust financing ability, but also that they have a stronger incentive to
finish the project early to collect revenue; 4) private firms normally have a deeper pool of
experienced personnel and a more resourceful support program. Employees of private
firms are exposed to different types of projects in different parts of a country or of the
world. They also can pull together a team of sub-contractors with whom they are familiar
in a short period of time to support them if needed. Given different regulations and the
region-focused nature of state-owned agencies, it is hard for state-owned agencies to
match private firms in terms of experience, exposure, and connection (with support
companies).
-41-
BOT is an appropriate package for Singapore to consider for two reasons. First, BOT's
characteristics align with Singapore's long-term interests. As mentioned in section 2.2
Opportunities, Singapore is in search for a niche market in the E&C field that will utilize
its management and leadership talents, and at the same time, will make its E&C services
exportable. Overseas BOT projects include sophisticated interfaces among the host
government,
Project
Company,
financier,
designer,
contractor,
and
operator.
Furthermore, their operation is subject to delays, political unrests, exchange rate
fluctuations, and inflation. Overseeing all these aspects call for a high level of
management ability. And since targeted clients are overseas countries, Singapore's E&C
services can be strategically exported. Second, Singapore has a big advantage in knowing
its clients - Southeast Asian countries - better than many foreign firms, which normally
demand much from the host country in the negotiation process to protect themselves from
exposing to the presumed high risk of doing business in the region. Singapore, on the
contrary, by knowing the countries better and being able to objectively judge the risks,
will more likely reach mutually beneficial and realistic agreements with the hosts. In
addition, Singapore should be more willing to accept a longer return period because of
the trust it has built with the countries through a long history of business and political
interactions. Though a longer return period entails running a higher risk, it will pay
Singapore huge dividends as it opens up opportunities which other countries have long
ruled out due to their unfamiliarity with and lack of confidence in the region.
-42
-
4.2
The BOT Structure
A BOT project roughly involves eight steps from start to finish.35 Below are features of
the different step:
Proposing a project
1)
A project can be proposed by either the host government or a private firm (or a joint
venture of private firms). In either case, the proposing entity sees the need for an
infrastructure such as a power plant, road, or port, and believes it can be constructed
using BOT. Private firms will only propose if they have known the central development
concepts of the government. Therefore, it is important for the government to have
constant communication with the private sector. Also, the government has to be educated
about BOT in order to distinguish which projects are BOT-applicable, and be ready to
give up the control of infrastructures to private firms. Claimed by professionals who have
had working experience in the region, Asian market reform is ahead of its political
reform,16 that is, most governments welcome the benefits brought about by foreign
investments, but are not willing to assume their share of responsibility and risk. In short,
the education of the government is paramount in the first stage of BOT implementation.
Another point needed to be emphasized is that if a project is going to use BOT, it has to
be proposed as a BOT project at this initial stage, since financing, payment and
management of BOT is very different from those of the other delivery methods. It will
benefit all parties by making the intention clear at the very beginning.
2)
Bidding
The bidding process begins with the host government announcing a Request for Proposal
(RFP), then short-listing interested firms (or alliance of firms) to few qualified one. The
short-list process, however, is seldom judged solely by the cost of the project, for BOT
3
36
This section draws on ideas from K.C Lee, C.A. Tou, S.B. Yam, (Translation) BOT Investment Methods
(China: Economics Publisher of China, 1996), 17-22.
Comments of Rollo Prendergast, ANZ Investment Bank. Source: Asia Law, Asian Infrastructure Profiles
1997 (Hong Kong: Asia Law & Practice Publication Limited Hong Kong, 1997), 8.
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-
does not require financing of the host government, except only when the Project
Company fails. The host government should pay attention to other parameters such as the
benefits the project will contribute to the society, its closeness to the government's
central development concepts, the firm's experience, synergy, quality, etc. There has
been numerous literature on evaluating methods, like that of Birgonul & Dikmen (1996),
Tiong & Alum (1997), and Lloyd (1996). Short-listed companies are normally invited to
present their bids, with the corresponding conceptual design, in three to six months. In
their presentations, they will give details about:
-
Expected Completion Date;
-
Cost Estimates & Schedules;
-
Financing Structure;
-
Fee Determining Mechanism & Concession Length;
-
Social & Economical Benefits to Host;
-
Risk Analysis & Management;
-
Dispute Resolution.
The host government will evaluate the proposals based on the aforementioned details.
3)
Negotiating & awarding contract
The host government, or its representative, will rank the proposals and start negotiating
terms and rights with the first-ranked firm - the ranking criteria varies from case to case,
but in general, economic attractiveness and risk are of the highest concern. The host
government has to grant the private firm certain rights and exemptions because it will
govern the eventual Project Company, which operates highly autonomously. For
example, it will have to alter any existing laws denying a foreign company owning a
national asset. Plus, the host government can protect the private firm by using its power
to reduce risks. For example, it can ensure that competing programs will not be
implemented during the construction and concession periods, or tax laws and wages laws
will not change to an extent that the project cannot be profitable; some even guarantee
minimum revenues (if the end product - such as power of a power plant - can be
purchased by government agencies). If the first-ranked private firm and the host
government agree on their respective rights, responsibilities, and gains, then a contract
-
44
-
will be awarded. If the first-ranked firm cannot reach an agreement with the host
government, the government will withdraw from the negotiation and start negotiating
with the second-ranked firm, and the same procedure follows.
4)
Setting up a Project Company
A Project Company is a separate entity from the winning private firm because there is a
need to separate the routine function of the private firm from that of the Project
Company. In terms of accounting, it is especially important as the BOT project is not
necessarily financed by the private firm, and its revenue is not part of the private firm as
well. As far as legal responsibility is concerned, the aforementioned winning firm can be
a general contractor, a designer / engineer, or a joint venture, therefore, a Project
Company has to be setup to hold as an individual legal entity. It also helps exclude other
parties from exercising the special rights or exemptions grand by the host government.
5)
Financing the project
The Project Company will issue bonds or equity, and borrow money from either or both
governments and banks to finance the project. The portion of equity ranges from 10% to
30%.37 When the Project Company borrows from a bank or the government, it may use
the equity it holds as lateral. In other words, if it fails to complete the project, the
borrower will become the legal owner of the project and enjoy the privilege and special
rights grand by the host government prior.
6)
Constructing
The Project Company can be the general contractor of the project, or it can hire a
company to perform the construction duty. If the Project Company hires another party to
participate in the construction process, it must be aware of the labor-related issues listed
in the contract to avoid conflicts.
Operating
7)
3"K.C
Lee, C.A. Tou, S.B. Yam, (Translation) BOT Investment Methods (China: Economics Publisher of
China, 1996), 21.
-
45
-
Just as in the construction phrase, the Project Company can either run the infrastructure
itself or hire another party to do so. During the operation phrase, the Project Company
should charge fees according to the pricing mechanism agreed upon with the host
government during the negotiation process. Similarly, tax payment and degradation
penalty should be paid based on the agreement. The Project Company is responsible for
the operation and maintenance cost during this phrase.
8)
Transferring
When the concession period is over, the ownership of the infrastructure, alongside with
all contingence funds, is transferred to the host government. The concession period can
be extended if both the Project Company and the host government agree to do so, under
any circumstances. Even if the concession period is not extended, the government can
still hire the Project Company as the operation manager and allow it to continue running
the infrastructure, but the distribution of revenue collected may differ.
BOT Organization
Like any other projects, a BOT project has its designer, constructors, finance team, as
well as operation manager and labor all governed by one "umbrella organization" - the
Project Company. The BOT Project Company oversees the functioning of all
departments, including finance and operation / maintenance, which are normally not part
of project management in regular delivery methods. A basic BOT management structure
can be shown as follows:
-
46
-
Figure 4.2a - Framework of BOT (Parties that function during concession is in bolded)
Host Government
BOT Project
Company
Finance Team
Investors
Design / Engineering
Team
Construction Team
Banks
Operation Team
I1
Toll Collection
Maintenance
Advertisement
Facility
Management
Real Estate
In a Singapore-led BOT project, aside from the host government and construction labor,
all other service teams can be based in Singapore. In a BOT project, many services are
still in need even after construction is completed. This demand for long-term services will
generate employment for Singapore in the E&C field. As we have argued in section 3.1
Singapore's Social Structure and Construction, the Singapore E&C service industry
lacks a stable demand to grow and to maintain its quality; BOT can be an excellent
remedy to this problem.
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-
4.3
Role of the Host Government
There have been many literatures on the role of the host government in BOT projects,
such as Fishbein & Babber (1996) and Lee, Tou & Yam (1996). It is generally perceived
that the host government is responsible for 1) giving guidelines about the project, 2)
making regulations on administrative issues such as minimum wage laws, tax laws,
environmental laws and more, and 3) creating an environment that will make BOT an
attractive investment for the Project Company.
Firstly, the host government should make its intention and expectation clear before the
bidding process. For example, the projected income of a toll road will be drastically
different whether or not the government announces its intention to develop the
connecting areas. It will be even more informative if the government announces the
degree and form in which it will develop those areas. The government should also make
it clear if it intends to collect part of the revenue (e.g. Thailand Second Stage
Expressway), or have a certain degree of control on tolls. Secondly, the host government
should give administrative support to the Project Company, such as expediting the
Project Company's permitting process, or assisting in land acquisition, etc. The host
government should also make regional administrators know of the rights and exemptions
given to the Project Company, or the project will be hindered by contradictions between
the central and local governments. Lastly, the host government has to make the BOT
project an investment as attractive as possible. Creating barrier of entry is just one of the
many methods that can be implemented. Take a toll road for example, the government
can subside a percentage of the fee each vehicle has to pay. By doing so, the fee of the
toll road will be lower and the infrastructure will attract more users. Granting tax breaks
is yet another way to invite BOT investments.
The support of the host government is probably the most important ingredient of a BOT
project, for it can affect the amount of risk the Project Company bears. If the host
government is corrupted, disjoint, unclear about its long-term plans, or unable to provide
the Project Company with legal and administrative support, the country will deem risky
-48-
to perform BOT and investors will put a higher premium on their investments, or simply
stop investing. Without sufficient investments to build service infrastructures, the group
that suffers the most will eventually be the residents of the country.
Figure 4.3a - The Reinforcing Cycle among Government, BOT Investors, and End Users
" Guidelines
" Administrative support
* Desirable investing
environment
Government
* Demand less from
government as private
investment satisfies
0 Lower political risk concerns
4 Lower risk premium
EdUss
SMore investment
i Low extra fee countering political risk
e Desirable environment generates future
contracts
In BOT contracts, the overall risk assumed by the host government is not
overwhelmingly high. The main uncertain it has to manage is the ability of the Project
Company in completing the project. On the other hand, there are only two things the host
government has to give up. First, for a certain period of time, the government loses its
ability to control the asset. Second, by allowing a private company collecting revenue
through operation, the host government gives up a valuable income source. However,
many projects using BOT delivery can be started and finished earlier than if they are led
by government agencies, therefore, infrastructures can benefit the community earlier.
Though the host government does not need to micro-manage the projects, it has to
provide certain degree of assistance in the event of natural disasters or local unrests.
Moreover, it should have either the resource or ability to overtake the project in case the
management company fails.
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-
5.0
Market Analysis
In this section, we will define an economically feasible market for BOT applications and
estimate its potential volume. In defining a Southeast Asian BOT market for Singapore,
one should:
(1)
First understand the type of service, such as power, water, or transport that is of
Singapore's interest and is tied to Singapore's strength.
(2)
(3)
Ascertain the infrastructure demand for that individual service type.
Lastly, predict the extensiveness of BOT applications in that sector and thus find
the size of Singapore's share in the BOT business.
Figure 5.Oa - Illustration of Market Definition Logic
Singapore's Sector
of Interest
WEAsia
Weran
Extensiveness of
BOT
SE Asia
Trans-
e
SE Asia
ZEnergy
portation
Demand
Demand
The three steps are depicted graphically in Figure 5.0a. This first step locates the shaded
circle, which represents Singapore's sector of interest. The second step finds the size of
the circle(s) that represents the demand in the sector(s) of interest. The final step
estimates the extensiveness of BOT, which is the size of the bolded ring in the diagram.
The area that is overlapped by the three different circles will be Singapore's share in the
Southeast Asian BOT business. The structure of this chapter will follow the same
procedure: Section 5.1 Sector ofInterest will investigate the location of Singapore' sector
of interest. Section 5.2 CurrentDevelopment will delve into finding the size of the sector
-
50 -
of interest. Section 5.3 Extensiveness of BOT will estimate the depth of BOT in that
sector.
5.1
Sector of Interest
BOT can be applied to various types of infrastructures. Power plants, hydraulics plants,
telecommunication stations, and highways are all feasible endeavors. For the case in
which Singapore being the Project Company and Southeast Asian being the client,
however, BOT should be best applied to transport systems such as toll roads and token
bridges. Urban transits and railways can be a possibility as well but given the current
competition and requirement, they do not fit the penetrating mode Singapore is in; once
Singapore has penetrated through successfully and is in an expansion mode, then those
project types can be serious candidates. Extended discussion on this topic is enclosed in
section 5.1.3 Competition.
5.1.1
Advantages
There are many advantages associated with building transport systems. First, they are an
important part of public good and social welfare. Efficient transport systems can increase
labor mobility, encourage land development, and enhance productivity. Also, they solve
problems of congestion, overcrowding and more. Value added by transport is estimated
to account for 3-5% of GDP. 3 8 Transport-related jobs also account for 5-8% of total
employment worldwide. 39 Sometimes countries build infrastructures despite running into
deficit because the facilities bring about immense intangible benefits. If Singapore can
take the financial burden away from the host government yet serve the public, it appears
to be an excellent business proposition to the host government, the users, and Singapore.
Second, depending on the structure of the contract, a transport system can be a very
versatile investment. Land along the trail is an asset; equipment or amenities along the
trail, if any, are also an asset. Therefore, building a transport system gives Singapore
38
39
The World Bank Group, (2001).
Ibid.
-
51
-
multiple potential revenue sources beyond construction. Moreover, these new, auxiliary
business opportunities will attract additional investments and give Singapore extra
maneuverability during concession. Lastly, transportation infrastructures are not easily
commoditized and provide a secure environment for investors. Unlike energy and water,
which are constrainted by market price and have no location advantage, transportation
infrastructures command huge regional market power and post high barrier of entry,
because they are unique facilities serving specific needs and alternatives are not easily
assessable. These three reasons make transportation infrastructures the most appealing to
a Project Company, and helpful to the host countries as well as users.
5.1.2
Disadvantages
Since transport systems span a large amount of land and require corporation among many
different local governments, their functioning involves a higher degree of complexity as
well as risk. Previous failures in similar fields include two series of Integrated Work
Program in Transportation & Communications (IWPTC) led by the Association of
Southeast Asian (ASEAN) Committee on Transport & Communications (COTAC). 4 ' As
Gerald Tan explains these failures in his book ASEAN: Economic Development and
Cooperation (1997), the problems came from the mal-alignment of interest and the lack
of organization. Local interest and politics will continue to be a big threat to BOT
projects.
The second disadvantage is also the reason why competitors are deterred: high initial
investment and inflexible client basis, or from a strategic planning viewpoint,
transportation projects have an unattractive exit strategy. Unlike a power plant, which can
serve different clients at one time, a transportation infrastructure can only serve one
particular client basis at all times, simply because it does not produce goods that are
40
These ASEAN programs intended to standardize national usages and regulations of infrastructures in
order to facilitate the intra-ASEAN movement of people and goods. Aside from policy-making, programs
extended to the construction of ports, land transportation, and aviation facilities. By the end of the first
series (1982-1986), which consisted of 59 projects with mainly maritime infrastructures, only 8 of them
were finished. The second series started a year after, but only 20 of the 90 projects were completed as the
program closed in 1991. Source: http://www.aseansec.org.
-
52
-
sellable but gives services that are not transferable. This problem of asset-related
inflexibility extents to the construction phrase as well: if a project fails to complete,
finished parts carry little worth because partial assets can hardly be liquidated.
Aside from managerial issues, investors will be unimpressed by the inflexible clientbasis, illiquidation of assets, high initial cost, and delayed cash flows of running
transportation infrastructures. Given the Asian regional growth has been so spectacular in
the last decade, investors will be more incline to place their money on other instruments.
In order to draw investments, project companies have to pay a higher interest rate or
reduce the project risk, but both are difficult to do given the very nature of transportation
investments: intrinsically delayed cash flows and long exposure to various types of risks.
That helps explain why most Asian infrastructures are built on government funding. It
will require a great amount of effort to change the mindset of many interest groups to
make privately-funded, privately-owned transportation projects feasible.
5.1.3
Competition
When Singapore enters the Southeast Asian market, it will face three main groups of
competitor: international players, state-owned enterprises, and local private E&C firms.
Each of these groups has its strength as well as shortcomings, and Singapore can
capitalize on them to create its niche in the BOT market. The distribution in concession
value among competing groups is as follows:
Table 5.1.3a - Asian Concession Market distribution by developers
Asia
Local
19,000
Value of Concession Awarded (USD$MM)
17,000
Europe
16,000
US
Other
15,000
1,500
Source: Kwak, Analyzing Asian Infrastructure Development Privatization Market, (2002).
Currently, western contractors undertake most of the technology-laden transportation
projects such as urban transit and railway systems in Southeast Asia (see Appendix A-6
for lists of recognized contractors). They lead the competition by providing clients with
technical savvy and mechanical reliability. With Singapore's limited experience in
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-
building urban transits and railways, it might be to Singapore's advantage to invest in toll
roads and token bridges instead, for they rely more on managerial skills such as financial
and urban planning, environmental development, road maintenance, pavement quality
control and more, than on technical skills such as system integration, feedback control,
etc. Once Singapore has commanded a sizable market share, it can contend for other
sectors such as those that are currently dominated by western firms. Two advantages
Singapore has over western firms are location and cultural similarity. These factors
capitalize into lower operating cost and political risk, which benefit the host country and
investors, respectively. Singapore should use and advertise these strengths effectively in
the bidding process.
Other Asian investors such as those in Hong Kong and Japan can be serious competitors
as well, for they possess the same locale and cultural advantages Singapore has.
Moreover, some have already established their presence in the transport market. When
competing against these firms, Singapore should 1) focus on a niche market or client
group; 2) promote value creation for the host instead of value capture from existing
players. The former can be achieved by entering programs whose required quality and
quantity of E&C services are suitable to Singapore, or serving a client group which has
previous working experience with Singapore's contracting and consultancy firms. The
latter can be achieved by exploring markets which existing firms failed to reach. By
doing so, Singapore-led BOT becomes a value-added proposition to the host country
instead of value capture mechanism to the existing firms.
State-owned infrastructure enterprises can also be a form of competitor, but in the coming
era of outsourcing and privatization, they will be heavily challenged. (The topic of
privatization will be discussed in section 6.1 Privatization of Public Infrastructures.)
Targeted are those that are in deficit or are struggling to break even. A lot of times when
state-owned companies run into deficit, they will regulate the price of service made
possible by their monopoly and political power. Through bringing in professional
companies to assume managerial and financial responsibilities, the pricing mechanism
will have to be more sophisticated and economical for users. It will also lower the
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financial burden shouldered by the host country, for they no longer have to cover deficits
state-owned enterprises may run into. The strategy of countering these companies is
educating the host government to accept the privatization paradigm. Once that has been
achieved, the remaining task will be Singapore's proving it can drive down the operating
cost and improve the quality through its professional management team. In certain
countries such as Indonesia, government agencies (PT Jasa Marga) may act as the
government representative in working with the Project Company on a BOT project, but
their role diminishes with the reduced financial responsibility held by the government in
this era of privatization.
Though local E&C firms can approach the market the same way Singapore does, they do
not have the comprehensive supporting services like Singapore's. In most large-scale and
sophisticated projects, they act only as local representatives of the general contractor.
Singapore can incorporate these firms in the BOT framework because they can provide
labor and local connections. Details on the subject of partnership will be discussed in
section 7.0 Implementation Schemes. Table 5.1.3b below concludes our discussion thus
far on competitors.
Table 5.1.3b - Comparison Among Competitors
Advantage over Singapore
Western Firms
Asian Firms
State-owned
Enterprises
Local E&C Firms
*
Counter Method of Singapore
Leading market position in
technology-laden infrastructures
* Focus on management-heavy
infrastructures at the penetrating
stage
* Capitalize on location and cultural
advantages in pricing and risk
assessment
* Leading market position in general
* Niche market penetration
transportation infrastructures
* Already established market presence
e Promote value creation but not value
Leading market position in general
transportation infrastructures
* Supported and recognized by the
host government
*
e Leading market position in general
*
*
construction
-
55
-
capture
*
Help promote the privatization
model to the host government
Capitalize on profession
management in pricing
Incorporate them in BOT delivery
5.1.4
Conclusion
Every sector has its advantages, disadvantages, and competition. Singapore's aim is
looking for a sector whose advantages align with the Southeast Asia market condition,
whose disadvantages are controllable by Singapore, and whose competition is to
Singapore's favor. Transportation infrastructures on a whole possess a higher potential
upside, provide a more secure revenue stream, and stage a more favorable competition to
Singapore than some other services in Southeast Asia. And their disadvantages are
mainly administrative and are modifiable given the correct strategy. Therefore,
transportation development appears to be a legitimate platform for Singapore to launch its
BOT campaign.
-56-
5.2
Current Development
Even though transportation infrastructures are suitable for Singapore, is there a legitimate
need for them in Southeast Asia? And which countries have such need? In this section,
we will first ascertain the countries which have the need, then predict the size of the
demand.
5.2.1
Location
Southeast Asia has a population of about 500 million.4 1 Despite geographical closeness,
Southeast Asian countries present different economic conditions because of their
different political backgrounds and vastly diverse natural resources. In the 1960's and
1970's, most of them developed their manufacturing industries to reduce their
dependence on foreign goods, and at the same time, raised tariffs so high that foreign
goods could hardly be sold locally. This strategy is normally referred to as "ImportSubstitution" manufacturing. In the 1980's, with the influx of foreign capital, most of the
countries moved from being "Import-Substitution" to being "Export Orientation",
meaning they extensively sold their manufactured products overseas. This change in
strategy not only affects income and living standard of individuals, but also affects
employment pattern, traffic demand, and urban development of countries.
MacroeconomicsFactors
Certainly, the more developed a country is overall, the higher the demand for public
infrastructures. The development of different sectors, however, presents slightly different
scenarios. The most paramount group is the industrial sector, because when industries
flourish, the transport of industrial materials, products, and wastes provides a strong
transportation demand. And since most industrial areas are located at the edge of the
cities for lower rents, transportation infrastructures also play a role in linking rural
industrial cities and urban areas.
41
Southeast Asia has a population of 0.516 billion, whereas East Asia has a population of 1.474 billion
(China included) in 1999. Source: United Nations, Population and Rural & Urban Development Division,
1999 ESCAP Population Data Sheet (Bangkok, Thailand: United Nations Publications, 1999).
-
57
-
The service sector does not generate traffic by the movement of physical goods, because
in contrast to industries, services require minimal shipment of raw material and end
product. What services created is commuting patterns of workers, which could become a
strong demand for transportation development. However, the length of commuting trips
is usually short and usage of the infrastructure is unevenly distributed across time: many
vehicles will use it during rush hours but few will do so in other hours. To further
discount the utility, some commuting trips are carried out by non-motorized transport
(NMT) such as bicycles, which is a prevalent means of transportation in medium income
cities. 42 All ths
these concerns bring about the question of profitability: is it worthwhile to
build a short, multi-lane transportation infrastructure given the competition from NMT?
And given that all but during rush hours will it reach its full capacity? In summary,
though the service sector generates a certain degree of traffic demand through commuting
patterns, the nature of the demand makes it quite strategically difficult and economically
risky to meet.
The agricultural sector contributes to the demand for transportation infrastructures in
roughly the same way industries do. The amount of traffic generated, however, does not
dominate the size of the market for couple reasons. First, locations that produce
agricultural goods are so widespread that it is impossible to capture most of the product
movement just by building several roads. Second, agricultural goods do not require
movement during production. They must be made in one place, and when they are ready
to be shipped, they will be directly shipped to their destinations (such as ports and
transportation terminals). Third, many countries are very protective of their own
agricultural goods and decline to imports them from other countries. As a result, a large
portion of the agricultural goods is kept within the country and the need for transport
reduces. This claim is partially reflected by a World Trade Organization statistics (2002)
that the growth in exported agricultural goods of the world has only been 50% in dollar
42
For example, in Phnom Penh, Cambodia, over 50% of the vehicles are bicycles and cycle-rickshaws; and
in Surabaya and Jakarta, Indonesia, 45% and 13% of the vehicles are non-motorized, respectively.
Source: United Nations Economics and Social Commission for Asia and the Pacific, Transport,
Communication, Tourism and Infrastructure Development Division, (2001).
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value from 1990 to 2001, whereas that of manufactured goods reaches 120%.43 Hence,
the agricultural sector's contribution to traffic demand should not be overly emphasized.
The wealth of the population is also a very important factor to consider. We will analyze
the relationship among wealth, transportation, and living pattern using a system dynamics
model. First, we assume people would like to start new households if it is financially
feasible, and the location of these new households is largely controllable by city
planning. For example, the city government can give subsides and tax breaks, or create
employment to attract people to move to certain places. City planning can place new
households close to their members' workplace to shorten commutes. By doing so, not
only that workers save time traveling to work, but also that transports of goods speed up
with roads being less crowded. Less commuting, faster transportation, in conjunction
with technology advancements, will result in an increased productivity of the nation.
Productivity generates wealth, and wealth encourages people to start new homes. This
reinforcing cycle is noted "RI" in Figure 5.2.la. But rent rises when land is in demand,
and it will constrain the number of new households. This balancing cycle is noted "B 1" in
Figure 5.2.1a.
Figure 5.2.1a - System Dynamics Analysis of Household Formation and other Macro Variables
Technology
Efficiency of
City Planning
Transportation
Development
R1
Wealth
R
Number of
Households
Rent
BI
Natural Growth
4
The Economist, The World in 2002, ed. Dudley Fishburn (London, UK: The Economist Newspaper
Limited, 2001), 83.
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The addition of households would tend to spread the demographic distribution through
the formation of sub-cities at the outskirt of an existing city. This potential, nonetheless,
can only be realized if the government builds a transportation network to link the subcities to one another and to the original city. Without the network, the city will only grow
mono-centrically and become overwhelmingly difficult to travel within.
Figure 5.2.1b - Demographic Distribution of a Developing City
High
Medium
Concentration
Concentration
High
Low
Lok
>Concentration
Concentration
a city.
The diagrams represent demographic distribution of
The one on the left is a city in which most of the population is
bounded to living in a concentrated area. The one on the right
depicts a highly concentrated city breaks into 4 sub-cities,
which are supported by a transportation network.
Transporion
N
If this expansion potential can only be unlocked with the aid of a transportation network,
one can make a reverse argument that established transportation systems can attract the
formation of households the way social incentives do, for we can view shortened travel
time as a form of subsidy. This feedback effect completes the reinforcing loop "R2 " in
Figure 5.2.Ia.
Though initial city planning tries to deploy different types of workers to different areas,
over time people change jobs and commutes start to resurface. An established
transportation network can counter the situation and keep the productivity of the
metropolitan from dropping by reducing congestion, driving down outsourcing cost, and
mobilizing labor. Without a good transportation network, efficiency of urban planning
will deteriorate over time. This balancing loop is labeled "B2 " in Figure 5.2.la. With this
final influence taken into account, our model is completed.
Insight
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60
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This system dynamics model helps explain two important ideas. First, productivity,
wealth, and population growth are balanced by rent ("B1") and the efficiency of city
planning ("B 2"). Housing programs can break the former balance by providing a solid
supply of housing, whereas transportation development can break the latter balance by
maintaining a constantly efficient planning regime. They together can improve
productivity, wealth, and living standard to a higher equilibrium level which could not be
attained prior. Second, recall we have stated that a good transportation network serves as
an incentive for people to create households ("R2 "). Therefore, in estimating the demand
for infrastructure, one should not only look at the existing households, but also the
potential households, because the current situation most likely suppresses a large portion
of potential households from initiating. The approach that avoids the problem related to
households is using the whole population, instead of number of households, or cars, as a
random variable in our regression model, which will be used and discussed in section
5.2.2 Volume Estimation.
Having an idea of the kind of elements to look for, one can narrow the Southeast Asian
clientele to a selected few countries. Below are economic indicators of several Southeast
Asian countries:
Table 5.2.1a - Asian Country Profile 1
GDP
Country
GDP %
GDP %
(1997(2001)
Per-Head'
2001)
Population
Growth %
(1997-2001)
Agricultural
% GDP*
Industrial
% GDP*
Services
% GDP*
Thailand
-1.2%
1.8%
$6,271
0.79%
13%
40%
47%
48%
$3,428
1.76%
20%
32%
Philippines
2.5%
3.4%
1.71%
14%
44%
42%
Malaysia
1.6%
0.4%
$10,493
21%
35%
44%
-0.3%
3.3%
$2,707
1.38%
Indonesia
40%
4.7%
$1,851
1.25%
25%
35%
Vietnam
4.7%
Laos
4.7%
5.2%
$1,294
2.48%
51%
22%
27%
Cambodia
3.0%
5.3%
$682
1.93%
43%
20%
37%
Singapore
3.4%
-2.1%
$23,041
3.50%
0%
30%
70%
Source: CIA, World FactBook; The World Bank; CountryWatch.com; International
Monetary Fund.
# 2001 estimated in 1995 USD.
* GDP composition of Thailand (est. 1999), Philippines (est. 1997), Indonesia (est.
1999), Vietnam (est. 1999), Laos (est. 1999), Cambodia (est. 1998), others are est. 2000.
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From Table 5.2.la, it appears that Thailand, the Philippines, Malaysia, and Indonesia all
possess a mix of GDP sources that is low in agricultural, high in industrial and services,
plus a relatively higher GDP per-head. In short, they have the desirable attributes to
attract transportation investments. Comparing to the aforementioned four, Vietnam is a
bit more agricultural-oriented
and has a lower GDP per-head. Nonetheless, the
Vietnamese government has committed itself to removing distortions in the economy and
improving banking and security transparency. 44 Being part of ASEAN and obtaining the
US Bilateral Trade Agreement give yet another boost to the prospect of the economy.
With the country's gradual transforming and regulating its economic model, Vietnam can
become a valuable market in the next decade.
Cambodia and Laos are still agricultural-heavy in their GDP mix. Plus, they tend to have
high percentage of their labor force engaging in the agricultural business, which implies
an economy of immobility (almost no commuting) and self-sustainability (low level of
international trade that leads to lack of shipment of goods). And that is reflected by the
lack of existing highway and railway (see the Table 5.2.1b below). All in all, they do not
seem to have the ingredients and the need for sophisticated transports systems.
Table 5.2.1b - Asian Country Profile 2
Country
Thailand
Philippines
Malaysia
Indonesia
Vietnam
Laos
Cambodia
Singapore
Area
(1,000
kM2)
Highway
(km)*
Railway
514
300
330
1,826
330
237
177
1
64,600
199,950
64,672
342,700
93,300
14,000
35,769
3,150
4,071
491
1,801
6,458
3,142
0
603
39
Agricultural
% laborforce
(km)*
54%
40%
16%
45%
67%
80%
80%
0%
Construction
% laborforce#
N/A
6%
9%
4%
N/A
N/A
N/A
13%
Exports
(USD$MM)**
59,433
32,600
85,233
53,900
11,733
308
833
126,000
Source: CIA, World FactBook; The World Bank; CountryWatch.com; International
Monetary Fund. Data are for year 1999 unless otherwise noted.
* Year of data not specified by CIA, World FactBook 2001.
* Labor force composition of Thailand (est. 1996), Philippines (est. 1998), Malaysia (est.
2000), Vietnam (est. 1997), Laos (est. 1997), Singapore (est. 2000)
** Average annual figures from 1998 to 2000.
4 For detailed plans, see Asian Development Bank. "Asian Development Outlook 2001 Update
Vietnam". Asian Development Bank online publications, 2002.
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62
-
-
As a result, the demand for transportation development in Southeast Asian mainly lies in
Thailand, Malaysia, Indonesia, and the Philippines. Vietnam is a serious prospect;
whether or not it can be a viable client based on its economic performance and its
government support on infrastructures in the future.
Table 5.2.1c are number of requests for proposal for public projects in the Asian
countries from 1999 to early 2002. Since BOT entails privatization of public
infrastructures, these data should be a good indicator of the strength of the current
market.
Table 5.2.1c - Number of Major Construction Proposals Announced (1999/1-2002/5)
Malaysia Vietnam Cambodia
Thailand Philippines Indonesia
Type
Bridge
Highway
#1
1
*2
Road
Road Works
Railway
2
Environment
1
1
1
4
2
1
1
1
Water Supply
3
2
Water Works
1
Airport
1
1
2
**5
2
Urban Transit
Laos
IF
8
3
9
1
2
1
Source: Jane's Infrastructure Monthly, various issues from 1/1999 to 5/2002.
National Road Improvement
Key: *
** Metro-Manila Urban Transport Integration Project
#
Asian-Euro Highway
## East-West Economic Corridor
(Year-to-year breakdowns are listed in Appendix A-7.)
Table 5.2. 1c largely agrees with our discussion thus far on the potential clients of BOT
transportation development. Thailand, the Philippines, Indonesia, and Malaysia are in
need of transportation infrastructures such as highways, roadways, and railways (tally of
these items is blocked in the top-left comer of Table 5.2. 1c). Planned large-scale projects
like the National Road Improvement Project in the Philippines and the Asian-Euro
Highway of Thailand are harbingers of a new wave of transportation development in the
region. Cambodia and Laos are relatively less industrialized and thus transportation is not
of the highest priority. Instead, they are making a strong effort to improve their water
supply and sanitation systems, which can be valuable foundations for industrialization in
the future (tally of these items is blocked in the bottom-right corner of Table 5.2.1c).
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63
-
Vietnam is in the transition process between the two groups. It still requires a large
amount of water-related work, but at the same time, has jumpstarted on its highway
development by initiating the East-West Economic Corridor, which will link Vietnam,
Cambodia, Laos, and Yunnan when comes to fruition.
5.2.2
Volume Estimation
After identifying countries whose macroeconomics
factors indicate a need for
transportation development, we can now estimate the size of the aggregated market. We
will regress data of developed Asian (2), Oceania (1), and European (6) countries to
obtain the relation of country size, population size, and national exports, against the
abundance of highway and railway. (Data used and regression results can be found in
Appendix A-8.)
Two major observations from the regression are:
1)
A country's highway abundance is dependent on population size and country size
only. The amount of exports is not significant.
2)
A country's railway abundance is dependent on exports and country size only.
Population size is not significant.
These observations imply that railways are more catered to the transport of goods and
highways are more commonly used for transporting passengers. They can be explained
by the economics of scale in using railway to transport large amounts of goods, and the
fact that cars are owned by most people in developed countries and they play an
important role in transporting residents (e.g. trips to cities, trips to malls, etc.). The final
regression equations are given below, with "t-stats" listed in parentheses below the
coefficients:
Highway (kin)= -11,348 + 0.1*Area (kM2) +
(-0.13)
(4.28)
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8801*Population (MM)
(6.45),
R = 0.95
Railway (km)=
-2,287 +
(-0.61)
0.004*Area (km2 ) + 0.07*Exports ($MM)
(4.54)
(6.04),
R2 = 0.94
Before one can directly apply these equations to predict the potential volume in Southeast
Asia, one has to be aware of the biases existed. First, the amount of highway is biased in
the positive direction because cars are commonly owned by people in developed
countries. Developing countries do not yet have the amount of automobiles to justify a
proportional demand for highway. Second, the amount of railway is biased in the positive
direction too, for most developed European countries are linked by land, whereas Asian
countries are linked by the sea. Asian countries do not have to rely as much on railways
for international trade. Third, the random variable "Exports" is data of only three recent
years (1998-2000). The coefficient corresponding to "Exports" may be different from its
long-term average. Now we will use the below data of the Asian countries to proceed
with the estimation.
Table 5.2.2b - Asian Country Profile 3
Country
Highway
(km)*
Area (km2)
Exports
(USD$MM)*
Thailand
64,600
4,071
514,000
199,950
491
300,000
Philippines
Malaysia
64,672
1,801
330,000
342,700
6,458
1,826,000
Indonesia
93,300
3,142
330,000
Vietnam
Total
765,222
15,963
3,300,000
Source: CIA World FactBook 2001; World Trade Organization.
* Unless otherwise noted, figures are for year 2001.
* Average annual figures from 1998 to 2000.
59,433
32,600
85,233
53,900
11,733
242,899
Railway
(km)
Population
(MM)
62
83
22
228
80
475
Applying the regression equations to the data stated in Table 5.2.2b, we find the expected
amount of highway and railway, and their difference from the current values, as shown in
Table 5.2.2c on the next page.
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65
-
Table 5.2.2c - Estimated Demand and Difference from Current Values
Railway
Expected
Highway
Expected
Country
Highway Railway (km)* Differencefrom Differencefrom
(km) *
Current (km)
Current (km)
521,241
866
4,957
585,841
Thailand
1,315
1,806
549,238
749,188
Philippines
4,611
6,412
150,692
215,364
Malaysia
3,703
1,835,628
2,178,328
10,161
Indonesia
632,495
*-2,984
725,795
158
Vietnam
3,689,294
10,515
4,454,516
23,494
Total
*The difference in railway in Vietnam is negative, thus we drop the entry in calculating
the total.
Interpretations& Adjustments
One should lower both estimates because of the biases aforementioned. Moreover, the
strong demand for highway in Indonesia predicted is based on inputting the large total
area of Indonesia in the regression equations. But the land of Indonesia is scattered into
many islands; the need for ground transportation will not be as large as if the country
comprises only of one piece of land.4 5 The moderate need for railway is counter-intuitive.
The shortage of car ownership may have forced countries to develop railway earlier and
over time leads to a relatively strong supply. Also, most of these countries used to be
colonies of the west and the European countries may have demanded their colonies to
import railway technology from them during their hegemonies.
Now we will begin a series of adjustments to our estimates. First, we assume the true
expected amount for highway in Indonesia is only 75% of the estimate because of the
scattering problem stated (we derive this quotient using basic geometry. See footnote for
derivation).4 6 Next, we will cut the aggregated demand for both highway and railway due
to the positive bias in both regressions. For highway, recall statistical determinants are
population and area (or population density). And since the bias is created by the
4 The five largest islands account for more than 90% of the land in Indonesia: Sumatra, 473,606 sq. km,
Java/Madura, 132,107 sq. km; Kalimantan, 539,460 sq. km; Sulawesi, 189,216 sq. km; and Irian Jaya,
421,981 sq. km. Source: www.AsianInfo.Org.
46 Let each circular island with radius "r" needs a highway along its circumference to serve its
transportation needs. 5 individual circles, representing the 5 main islands of Indonesia, will need 31.4r of
highways. Now if 4 circles are surrounding and touching the fifth circle and a highway network is needed
to connect the centers of the circles, the shortest length of such network is 9.7r. Therefore, if the islands
are separated, it will only need 31.4r / (31.4r+9.7r) = 76% of the amount as if they are connected.
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66
-
differential in car ownership, it is natural to use the ratio in projected car density between
developed countries and Asia as our discount factor. In order find the ratio, we will need
to multiply car ownership with population density. Car ownership is 366 cars per 1000
persons in OECD (excluding US) countries in the mid-1990's, and is 29 cars per 1000
persons in Asia.47 According to World Resources 1996-97 (1996), car ownership growth
from 2000 to 2010 is about 25% in developing countries and 14% in developed
countries. 48 Let us assume the Southeast Asian market performs better than the average of
the developing world, and that car ownership will reach 40 cars per 1000 persons
(corresponses to an increase of 38%) in 10 years, and that of Europe will raise 14% to
417 cars per 1000 persons. The current average population density of Asia is around 3.7
times that of the developed countries and is assumed to stay roughly the same in the next
decade. We multiply the two fractions and find that the ratio in projected car density
between Asia and OECD countries is about 35%.
3.7 (persons/ kM2)
417 (European Car/1000 persons) 1 (persons/ km2)
40 (Asia Car/1000 persons)
*
=
35% (Asian Car/ km2 )
(European Car/ km)
As for railway, its main usages are domestic transportation and intra-continental
shipping. We have to discount the influence of the latter in the estimate because Asian
countries do not rely heavily on railway for intra-continental shipping. We can apply the
principle used previously in the case of Indonesia. Previously, ground transportation was
not needed to link the islands of Indonesia. Now, ground transportation is not needed to
link countries across the continent. As a corollary, only 75% of the estimate demand for
railway is needed to serve domestic uses. After the two adjustments, the final demand for
highway will be about 603 thousand kilometers and that of railway will be 4 thousand
kilometers, which account for 79% and 24% of the existing amounts, respectively.
4
4
OECD and the European Conference of Ministers of Transport (ECMT). Urban Travel and Sustainable
Development. (OECD and ECMT, Paris, 1995), 31.
World Resources Institute, United Nations Environment Programme, United Nations Development
Programme, and The World Bank. World Resources 1996-97: A Guide to the Global Environment. (UK:
Oxford University Press, 1996), chapter 4.
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67
-
Table 5.2.2d - Adjustment Procedures and Results
Highway to be
Procedure
built (km)
Railway to be
built (km)
Regression results (100%)
3,689,294
10,515
Adjust with scattering factor of Indonesia (x75%)
3,144,712
7,975
603,255
3,872
Adjust with positive bias. Real demand is 35% &
75% of estimate for Highway & Railway,
respectively (x35% & x75%)
As one will see in the following section, the amount of BOT roads that is under
feasibility study in these countries is about 6,000 kilometers, which is about 1% of our
final estimate. The huge demand in the transport field is undoubtedly constrained by the
current development pace.
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68
-
5.3
Extensiveness of BOT
With laws about private ownership of national assets being developed, knowledge about
managing infrastructures being accumulated, and the concept of outsourcing national
assets being commonly adapted by Asian countries, the percentage of transportation
infrastructures being run by BOT is rapidly increasing, from non-existing in the 1980's to
dominating almost all new projects in the early 2000's. Table 5.3a demonstrates the
growth of toll roads, with the percentage using BOT, in the targeted countries. The large
amount of toll road proposals, most in BOT forms, that are under investigation implies
that countries have already recognized the importance of using private investment to
facilitate their transportation demand.
Table 5.3a - The Role of Toll Roads in selected Asian Countries
Indonesia
Malaysia
Philippines
Thailand
Existing As of 1980
Existing As of 1990
Existing As of 1997
Under Construction as of 1998
47 km
272 km
457 km
237 km
0 km
868 km
1,127 km
230 km
152
152
168
148
km
km
km
km
0 km
57 km
92 km
304 km
% in length Running BOT as of 1999
>50.0%
>80.0%
> 9.5%
>50.0%
Under Investigation Total as of 1998
Under Investigation BOT as of 1999
959 km
610 km
659 km
708 km
632 km
697 km
4,334 km
4,183 km
Role of Toll Roads
>95.0%
-100.0%
-100.0%
>60.0%
% in length Under Investigation as of 1999
0.5%
0.1%
1.2%
0.2%
Toll road as % of Total Roads as of 1999
Source: World Expressways, (EHRF, 1998); Indonesia Ministry of Public Works, Toll
Roads: Indonesia Investors Opportunity (1997); various MOPW data sources, (1998);
Malaysian Highway Authority Resource Paper, (1998); Malaysia Ministry of Works;
PNCC and DPWH Project Profile Sheets, (1998); ETA, DOH, (1998); The World Bank,
Asian Toll Road Development Program: Review of Recent Toll Road Experience in
Selected Countries and Preliminary Tool Kit for Toll Road Development, (1999).
Economic Planning Unit, Malaysia, Eighth Malaysia Plan, 2001-2005, (2001); Asian
Development Bank, Developing Best Practices for Promoting Private Sector Investment
in Infrastructure - Roads, (2000).
Performancein Individual Countries
In Indonesia, the government introduced BOT to its toll road business in 1987 and has
never surrendered the idea since. At first, BOT contracts were giving out in a noncompetitive style, meaning the Indonesian government appointed private companies to
perform joint ventures with PT Jasa Marga (the Indonesia Highway Corporation). There
have been claims that those private companies were controlled by the children of then
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69
-
president Suharto (Handley, 1997). Later on, the bidding process became competitive and
the role of PT Jasa Marga diminished. PT Jasa Marga has not been the leading company,
or being a joint venture partner of any BOT proposal that is under investigation as of
1998.49 All toll roads that started operating after 1990 are constructed in some forms of a
BOT structure. These BOT projects collectively correspond to roughly 50% of all toll
roads at present. As almost all new projects are running BOT, the representation is
expected to climb. Since the older generation of BOT toll roads were directed by political
influence, land acquisition procedure, finance structure, and tolling mechanism have not
been as developed as one would expect. And most importantly, the players involved in
previous BOT toll roads are all from Indonesia, even after the introduction of competitive
bidding. The degree in which a BOT project can be led by a foreign firm has yet to be
tested.
In Malaysia, the government announced its privatization plan for roads in 1983, then the
parliament passed The Federal Roads (Private Management) Act in 1984, which allows
the Government to grant private companies the right to collect toll on public roads. Since
then, most toll roads in Malaysia are running BOT. The heralded North-South
Expressway of Malaysia, which accounts for almost 80% of the national toll roads, is the
pioneer BOT project in the country. The government started building the roadway in the
1980's. Then in 1985, the government contracted out the remaining section in a form of
BOT. The toll road has been highly profitable since its inception in 1988. But some
believe that the political background of the project company and the fact that the project
was halfway done at the conversion played an essential role in its success (Handley,
1997).50 Aside from the North-South Expressway, there have been numerous projects
being carried out in BOT, however, there has not been a project with a comparable
magnitude: North-South Expressway is 848km long, whereas the next longest BOT road,
Kuala Lumper - Karak Highway, is only 60km long. Looking into the immediate future,
World Expressways (EHRF, 1998); Indonesia Ministry of Public Works, Toll Roads: Indonesia Investors
Opportunity (1997); various MOPW data sources (1998).
50 The project company is Project Lebuhraya Utara Selatan (PLUS), which
was run by Malaysian
engineering firm United Engineering (M) Ltd. Prime Minister Mahathir Mohammad is a leader of the
company. Source: Paul Handley, "BOT Privatisation in Asia: Distorted goals and processes" Asia
Research Centre of Murdoch University Working Paper No. 82, (Australia), (1997).
49
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70
-
among the projects that are estimated to finish before 2004, 42% (238km of 567km) are
running BOT.
In Thailand, the privatization program has been expanding quickly, but has been enduring
growing pains at the same time. The Thai government creates the Expressway & Rapid
Transit Authority (ETA), a self-financed, state-owned agency, to construct and operate its
toll roads. The ETA does not have BOT contracts with the government; it merely
constructs and operates the toll roads for the government, without a concession period,
and not aiming at making profit for investors. The ETA still operates the First Stage
Expressway and Ram Inthra, which together account for 47% of the existing of toll roads
in Thailand (47km of 99km). In the 1980's, the Thai government invited private firms to
bid on the Second Stage Expressway using BOT, which eventually started its operation in
1983, and became the first BOT road in the county. Then in 1994, another BOT toll road,
the Don Muang Tollway, started its operation. The Second Stage Expressway and Don
Muang Tollway, operated by private firms BETL (led by Japanese firm Kumagai) and
DMTC (led by German firm Dyckerhoff & Widman and Thai businessmen),
respectively, together occupy 53% of the national toll roads. The BOT projects, however,
are not implemented without difficulty. In 1983, on the verge of starting the operation of
the Second Stage Expressway, the Thai government insisted on reducing the toll to 2/3 of
the amount agreed in the contract. After rounds of fruitless negotiation, the government
asked involved Thai banks to buy out Kumagai's share and let a new entity operate
BETL. Similarly, in Don Muang Tollway, the Krung Thai Bank of Thailand was asked to
be the primary financer of the project though the project did not seem financially
sustainable. As it turned out, the project lost money and involved banks askied the
government to buy out their shares. As one can see, despite Thailand's eager
implementing of BOT in their privatization scheme, there are still issues in the level of
control that have to be improved for future BOT toll roads to be successful.
In the Philippines, using BOT on roads is a pretty modem concept. The North Luzon
Expressway of the Philippines has been built and run by the Philippine National
" Economic Planning Unit, Malaysia, (2001).
-71-
Construction Corporation (PNCC) since 1968. But in 1998, it tendered a 30-year
concession to the Manila North Tollway Corporation (MNTC) to manage its operation,
maintenance, and expansion. It is technically not a BOT contract by all means. In 1998,
the Metro Manila Skyway and Manila-Cavite Toll Expressway started their true BOT
operations. But they only contributed to less than 10% of the total toll roads in length
(15.9km of 168.3km). The delayed BOT development is due to the Philippines' slow
development of the supporting legal system. The Built-Operate-Transfer Law, R.A.
No.6957, which spells out the policy and regulatory framework for private sector
participation in infrastructure projects and other public services, was non-existed until
1990. However, the Philippines have been promoting the BOT vigorously in all new
projects. The current 147.9km of toll roads under construction are all under BOT
contracts. 52 And most of the toll roads proposals that are being studied are running BOT
as well; even among proposals that are not employing BOT, some of them are inviting
individual investors to provide them with project-based financing. All these recent and
rapid development are part of the Philippine Infrastructure Privatization Program (PIPP),
an effort to achieve efficiency and timely delivery through privatizing national assets.
As for Vietnam, the extensiveness of BOT is extremely limited. The concept of BOT is
only authorized legally in 1992.53 There has been less than ten BOT cases in Vietnam as
of the end of 2000 - all fields included.
As shown previously in Figure 4.3.1c, Vietnam
is in a greater need for other services such as water treatment, telecommunication, and
power than for transportation infrastructures. Moreover, according to a World Bank
estimate, the current traffic volume in Vietnam is about only 1/3 of the breakeven point
of running a BOT toll road." As a result, there has only been one BOT project in the
transportation sector so far, Hanoi-Haiphong Highway, and it is still in the pre-planning
stage.
PNCC & DPWH Project Profile Sheets, (1998).
53 Peter N. Sheridan, "Getting Started - An Insider's Guide to Starting a Business in Vietnam," web page
article by Vietnam Venture Group, Inc., (2001). www.vvg-vietnam.com.
52
14
Ibid,.
5
Ian G. Heggie, & P. Vickers, "Managing & Financing of Roads," World Bank Technical Paper, (1998).
Quoted in The World Bank, "Vietnam - Moving Forward - Achievements and Challenges in the
Transport Sector," The World Bank Vietnam Office, (1999).
-
72
-
From this section, one can see the tendency in privatizing transportation infrastructures
among Asian countries, and BOT has been an integral vehicle in helping countries
achieving this goal. Southeast Asia has transformed itself from having minimum toll
roads in the 1980's, to almost ten-folding the toll road amount and having about 50% of
them running BOT in the 1990's, to almost triple the toll road amount again and having
nearly all new projects running BOT by the mid-2000's (see Table 5.3a). However, these
splendid statistics are generated only from a couple large projects whose Project
Companies are still dominated by local firms (recall cases cited in this section). The
involvement of international players has not been particularly large. According to a study
done by Kwak (2002), foreign firms account for 56% of concession value of all BOT
roads as of 1998.56 This is a relatively small number compare to the 91% in the power
and 67% in the water supply sector, considered transportation accounts for about half of
the total concession value in Asia.5 7 And among the foreign firms that have penetrated
through, many have experienced tough times in this fast growing and ever-changing
market (recall the Kumagai case in Thailand). According to the same study, about 30% of
the concession value is scrapped because of financial losses, cancellation, delay, or
suspension.5 8
Though the demand for transportation development is increasing and the trend in
applying BOT is growing, whether Singapore can gain a significant share as an
international player has yet to be seen. It is the objective of the remaining chapters to
devise the appropriate penetrating strategies for Singapore, so that it can become a
prominent player in the market.
56
5
51
Young Hoon Kwak, "Analyzing Asian Infrastructure Development Privatization Market," Journal of
Construction Engineering & Management. Vol. 128, No. 2, (April 2002): 113.
Ibid,.
Ibid, 114.
-
73
-
6.0
Market Assessment
The aim of this section is collecting insights form various events happening in the region
that will affect the usage of BOT. Currently, the three major forces in Asia are: (1)
privatization of public infrastructures, (2) market consolidation, and (3) adjustment after
the Financial Crisis of 1997. These forces are hereby examined.
6.1
Privatization of Public Infrastructures
As mentioned in section 4.1 Background of BOT Solutions, and as suggested by various
scholars such as Liddle (1996) and Donahue (1989), privatizing public assets can take
full advantage of private firm's efficiency and creativity. But aside from these intangible
benefits, it also provides a new source of financing that is desperately needed in Asian
countries.
Asia is growing at a fast pace and is in great need of all sorts of infrastructure like power
plants, roads, water supply systems and more. In developed countries, demand for
infrastructure of all kinds is growing at about 1% per year, but in developing countries,
the demand is growing at about 8% per year. 59 One of the reasons for this huge need is
the leaping growth in the demand for transport, which increases at 1.5-2.0 times that of
GDP growth rate in developing countries. 60 According to the International Finance
Corporation (IFC) (1996), a division of the World Bank promoting private sector
investment in developing countries, USD$200billion is need annually for constructing
infrastructures (all sector) in developing countries worldwide, and Asia is one of the areas
that have the highest need. 61 As one can see from Table 6.1 a on the next page, in the
1990's, the annual road vehicle growth in Southeast Asia is around 7%, annual GDP
growth is about 4%, and annual population growth is around 1.3%. The supply of roads,
however, is well short of these numbers, at around 0.8% per annum.
59 Declan Duff, "Private Investment in Infrastructure - Opportunities and Challenges," Global Infrastructure
Development, World Markets in 1999 (World Markets Research Centre, 1998).
60
61
The World Bank Group, (2001).
Judy Schriener, Mary B. Powers, "International Privatization Heads Out of the Clouds and into Reality,"
Engineerina News Record, 26 August 1996.
-
74
-
Table 6.1a - Road Expansion vs. Population Expansion in Asian Countries
Average
Average
Average Annual Growth Rate
Country
GDP
Population
in
Network
Road
of National
Growth
Growth Rate
Length (1993-1999)
(1991-2001)
(1997-2001)
Average Annual
Growth Rate of
Road Vehicles
(1991-1999)
3.8%
0.8%
0.4%
Thailand
2.0%
1.8%
N/A
Philippines
4.4%
1.4%
0.6%
Indonesia
5.5%
1.7%
1.4%
Malaysia
Source: United Nations and ESCAP, Statistical Yearbook, (various
CountryWatch.com; The World Bank, World Economics Indicators, (1996).
6.9%
7.3%
7.3%
10.4%
issues);
The cost of infrastructures has to be financed by a combination of three sources: funding
from the government, loans from international banks (e.g. World Bank, Asian
Development Bank), and sponsorship from private parties. Funding from the government
has limitations in most cases for two reasons. First, the government may have other social
responsibilities that are of a higher priority. Examples are water works, education, fire &
police services, national defense, etc. Public investment in transport typically accounts
only for about 4% of GDP (Klein, Michael & Roger, 1994).
In the case of Southeast
Asia, when the economy is growing so quickly and many facilities are to be built, the
government simply cannot allocate a solid amount of funding to transportation
infrastructures on a yearly basis. A World Bank report (2001) states that in developing
countries,
only
infrastructures.
about
2.0-2.5%
of their
GDP
is
invested
in
transportation
Moreover, given the strong growth in demand, even an expenditure of
3.0-4.0% of GDP may not be able to meet the escalating need: recall demand for
transport facilities increases at 1.5-2.0 times that of GDP growth rate in developing
countries. For Southeast Asian nations, that will entail an expenditure of 7-8% of their
GDP. Alternative funding sources are definitely needed.
The second option is borrowing from international financial agencies such as the World
Bank and Asian Development Bank (ADB). But borrowing requires interest payment,
which goes higher as the loan grows larger. In Southeast Asia, since the number of
Klein, Michael, & Neil Roger, "Back to the Future: The Potential in Infrastructure Privatization," Public
Policy for the Private Sector, The World Bank (Washington DC), (1994).
63 The World Bank, (2001).
62
-
75
-
project is growing so rapidly, leading to more and larger loans, continuous borrowing
cannot be an economical solution. If one looks at the lending record of the World Bank
and ADB, one will find that transport has been the category with the largest loan size
over the last ten years: the World Bank has lent USD$9.7billion and ADB has lent
USD$11.1billion (see Table 6.1b for an abridged record. Detailed records are in
Appendix A-8).
Table 6.1b - World Bank & ADB lending for Asian Transportation Development
Lending to East Asia & Pacific in
The Transportation Sector, 1992-2000 (USD$MM)
Bank
Avg. 92-97
1998
1999
2000
Total
World Bank
1,148
1,110
1,042
629
9,669
Asian Development Bank
1,238
1,151
1,274
1,224
11,077
Total
2,386
2,261
2,316
1,833
20,746
Source: The World Bank, Annual Report 2000. (2001); Asian Development Bank,
Annual Report 2001, (2002). Data of ADB is 3-year running averages.
However, annual borrowing for transportation development has stabilized in recent years
despite the sector's quick expansion. That implies countries' debt level has reached a
mark so high that countries stop further borrowing because it is no longer economically
profitable. As a corollary, nations must search for other financial resources, which do not
have to bear high interest payment, to support their infrastructure development. And that
resource will be private sector investment, which we will hereby discuss. Indeed, if one
omits loans for financing and economic policy, which grew large because of the Financial
Crisis of 1997, the aggregated amount borrowed from the two banks is dropping in recent
years. In other words, incorporating private investment in infrastructure financing has
taken place not only in the transportation sector, but also in some other categories.
Financing from private investors is becoming more and more prevalent in recent years.
The World Bank reports that (1997), "Private sector investment accounts for at most 10%
of today's infrastructure investment in East Asia [as of 1997], yet there is growing
recognition that private investment should increase to some 30% over the medium
term." 64 This anticipated progress, however, is temporarily challenged by the financial
" The World Bank, Annual Report 1997, (1998). www.worldbank.org/htm-l/extpb/annrep97/
-
76 -
crisis. Since a lot of Southeast Asia's infrastructure projects are financed by local banks,
when the Financial Crisis of 1997 wiped out a number of the banks, private sector
lending took a dive from the peak of USD$10.1billion in 1997 to below USD$2billion in
1999 (see Table 6.1c below).
Table 6.1c - Investment in Road Projects with Private Participation in Developing Countries (90-99)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Total
7.6
2.3
2.6
3.1
5.1
4.7
8.9
10.1
8.6
1.8
54.8
33
7
10
19
41
16
39
56
46
12
279
Investments
(USD$ billion)
Projects
Source: The World Bank, Private Provision of Public Services Group, (2000).
Despite the temporary setback due to the financial crisis, privatization has been playing
an essential role in infrastructure development in the last decade. For example, as stated
by the World Bank Privatization Database, the sales of public services (all types,
including energy, agricultural, manufacturing, etc.) to private companies in Asia have
been growing dramatically since 1990 (see Table 6.1d below).
Table 6.1d - Privatization Revenues in selected Asian Countries (USD$MM)
Country
1990
1991
1992
1993
1994
1995
1996
1997
1998
Total
China
Indonesia
Malaysia
375
11
190
387
1,262
14
2,883
2,849
31
2,148
2,226
1,748
798
649
2,031
2,519
919
1,008
214
9,120
141
704
611
122
-
17,647
5,285
10,028
1
244
2
754
238
10
1,638
471
18
494
242
-
207
4
22
291
226
371
48
-
353
5
3,730
1,643
266
376
834
5,161
7,155
5,508
5,410
2,680
10,385
1,091
38,600
Philippines
Thailand
Other
Total
Source: World Bank Privatization Database, (2000).
Aside, the percentage of IFC's portfolio being infrastructure investments went up from
4% in 1990 and 11% in 1994 to 23% in 2001, with one-third being transportation
undertakings. The number of infrastructure projects approved by IFC increased from just
8 between 1966 and 1987 to 63 between 1990 and 1994.65 Also, according to the World
Bank's Private Participation in Infrastructure (PPI) database, the amount of private
investment in developing countries grew almost six-fold in the 1990's before financial
crises hit Asia and South America (see Figure 6.1 a on the following page).
65
International Finance Corporation, various reports.
-
77
-
Figure 6.1a - Private Participation in Infrastructure Projects in Developing Countries
140 120-
100 -
C
--
Transport
- - - -East
Asia & Pacific
World
80
CL- 60
40
20
0]
>
1990 1991
1992
1993 1994 1995 1996
1997
1998 1999
Time (Year)
Source: World Bank's Private Participation in Infrastructure (PPI) database, (1999).
The privatization paradigm has just started to take shape in Asia, and there are ample
opportunities for Singapore to capitalize on this new concept. As suggested in section 5.3
Extensiveness ofBOT, privatization using BOT contracts is going to be a practical vehicle
in such endeavor. In 1997, the World Bank anticipated the amount of private financing
would triple in the medium term. After the finance crisis, the current level of participation
is just slightly above half of that of 1997. That means the potential volume of private
participation can grow up to 5-6 times of the current level. Though privatization
experiences a temporary setback in the recent years because of the slowdown of the
world economy, it is going to be an imposing driving force in the modem world economy
in years to come.
-
78
-
6.2
Market Consolidation
There is a tendency for the Southeast Asian economies to consolidate, driven mainly by
two forces: 1) the emergency of China creates new business alignment in Southeast Asia
to compete for FDI; 2) after the Financial Crisis of 1997, countries realize collaborated
effort is the best way to help one other recover from losses. In this section, we will delve
into these driving forces and analyze the effect of market consolidation on BOT delivery.
The Influence of China
Since China has a cheaper, larger labor supply and absorbs more imports than Southeast
Asian countries, it appears hard for the Southeast Asian countries to compete against
China for foreign investment. Global FDI in Southeast Asia has dropped sharply from a
high of USD$30billion in 1996 to around USD$10billion in 2001 after the financial
crisis.66 But at the same time, FDI in China is increasing and now stands at some
USD$50billion a year in the early 2000's.67
The growth of China brings about couple chemistry changes among Southeast Asian
nations. First, Southeast Asian countries, which find themselves fighting for FDI against
China, will rely heavier on the trading bloc of Association of Southeast Asian (ASEAN)
than before. The liberation plan of ASEAN Free Trade Area (AFTA), which consists of
10 countries and 500 million people, will qualify to be the United States fourth largest
trading partner. 68 The economic rationale of ASEAN is benefiting its members through
trade creation and trade diversion (Tan, 1997). Trade creation occurs when countries
reduce tariffs, imports become cheap and demand rises. Trade diversion occurs because
as now member countries rely on intra-regional trades, they will become less dependent
on trading with other regions of the world and can collectively retain more capital in the
area. Integrated national markets among ASEAN countries improve the trading
relationship among countries, and their collective market becomes an attractive selling
Agence France-Presse News, "ASEAN aims to boost trade ties with US in Friday talks: minister"
Agence France-Presse News (Bangkok), 4 April 2002.
67 Ibid,.
68 Ibid,.
66
-
79
-
point to the west. As Vietnam Trade Minister Vu Khoan puts (2002), "We want to
encourage investment from the United States to ASEAN countries, and some areas of
cooperation, trade facilitation and human resources development. We believe that a
strong, cohesive, economically dynamic ASEAN region is very important for Southeast
Asia and for US partnership with Southeast Asia." 69 China has also shown its intention to
create the world's most populous free trade block - covering two billion consumers - by
agreeing to join ASEAN within the next 10 years. 70
Second, if China develops at a fast pace and needs a large amount of imports as expected,
evidence has shown Southeast Asian countries will be the first to export their products
because of their low prices and geographical closeness. From 1990 to 2000, the relative
share of manufactured goods exported to China from ASEAN countries has increased
38%.
And in 2001 alone, China has imported USD$42billion worth of goods from the
other Asian countries. 72 It is estimated that once China has joined the free trade area, it
could raise ASEAN's exports to China by USD$13billion, or 48%.73 Increased trades
between China and Southeast Asia help bloom the Southeast Asian markets and
Singapore will have the potential to generate more business with them. As history may
suggest, ASEAN countries have increasing intra-ASEAN trade in the last decade, despite
conventional belief that ASEAN is an export-oriented market to OECD countries (see
Table 6.2a below).
Table 6.2a - Intra-ASEAN Trade as % of Total Trade of a country
1986
1990
Country
9.2
Indonesia
21.7
Malaysia
8.7
Philippines
22.6
Singapore
14.2
Thailand
Source: International Monetary Fund, Direction of Trade
issues).
1994
9.1
7.8
24.0
22.9
12.9
8.7
21.5
27.2
15.8
11.9
Statistics Yearbook, (various
1996
11.4
28.1
12.4
25.5
15.2
Realization after FinancialCrisis
69
70
71
72
7
Ii,
According to AFP News (Bangkok), 4 April 2002, China has agreed to join ASEAN in November 2001.
M Richardson, "China Seen by ASEAN as Market," International Herald Tribute, 26 April 2002.
Ibid,.
Ibid,.
-
80
-
Southeast Asian nations used to rely much on their exports to the western countries to
sustain development. After the Financial Crisis of 1997, however, they come to realize
they should carry trades with other regions of the world so that their economies will not
be overwhelmingly dependent on those of the western world. The first step toward such
goal will be establishing a strong trading relationship with the neighborhood countries,
and hence they foster the idea of ASEAN. The effect of the financial crisis will be
discussed in the next section.
Impact on BOT
When the Southeast Asian economies consolidate, there will be more business
collaboration among nations, and that may help Singapore's BOT business in three ways.
First, other countries will have a better idea of the management style, capability, and
strengths of Singapore's service sector. This knowledge can help Singapore promote its
services overseas and BOT-related services will indirectly benefit. Second, a more
interconnected financial sector can help Project Companies find extra financial resources.
The current bond market in Asia is very underdeveloped, and the equity markets are
mainly run on local investments because there is not enough transparence about the
markets that would draw foreign investments. International business collaboration can
eliminate these shortcomings and strengthen the financial sector for the Asian community
at-large. Lastly, if the Southeast Asian countries can build a trusting and cooperative
business relationship, cross-nation BOT may become a possibility, just as the Euro
Tunnel takes place in a closely linked European community.
-
81
-
6.3
The Financial Crisis of 1997
The financial crisis in 1997 has a long-lasting effect on the outlook of the Southeast
Asian region, as far as trading and investing patterns, practice, and policies are
concerned. We will briefly look into the causes of the crisis and how the event changes
the Southeast Asian market and the implementation of BOT.
6.3.1
Causes
Despite the fact that Southeast Asia enjoyed great success from the immense growth in
exports in the early 1990's, there existed a fundamental flaw in its growth model, that is,
the export expansion was mainly due to the expansion of market share but not to the
growth of end-user demand (Siamwalla, 2000). The world demand of natural resources
and electronic parts simply could not keep pace with the export growth rate for a
protracted period of time. In addition, some have argued that Southeast Asian countries
did not have the efficient infrastructure to handle the increasing manufacturing demand,
and that their wages were no longer staying at a low level after years of development
(Islam, 2000). Resulted by the combination of the aforementioned reasons, national
exports of Southeast Asia had slowed down since 1995. As a corollary, the current
account deficit of many Southeast Asian countries raised. The change in exported goods
and current account deficits are shown in Table 6.3.1a:
Table 6.3.1a
Annual % change in
Dollar value of exports
1993-1995
1996
Current account balance as
% of GDP
1997*
1993-1995
1996
Indonesia
10.2
9.7
8.9
-2.2
-3.5
3.2
-6.5
-4.9
Malaysia
21.9
6.3
Philippines
21.7
16.7
24.0
-4.2
-4.7
-6.3
-8.0
20.1
-1.2
2.3
Thailand
Source: ESCAP Secretariat calculations, based on United Nations, Monthly Bulletin of
Statistics, vol. LI, No. 9, (1997); Asian Development Bank, Key Indicators of Developing
Asian and Pacific Countries 1997, (1997); International Monetary Fund, tape no. 92165F
and International Financial Statistics vol. L, No. 12 (1997); and United Nations, The
World Economy at the Beginning of 1998, (1997).
* Figures refer to the first half of 1997, annualized growth rate.
-
82
-
Such a deficit had to be financed by a capital inflow or the countries would apply strong
pressure on their currencies in the exchange market. As a result, the Southeast Asian
countries liberated their capital inflow/outflow restrictions to attract foreign capital
inflow.
Many countries in Southeast Asia opted for maintaining relatively high interest rates in
order to hold a stable exchange rate. The large and continuing differential between
domestic interest rates and international interest rates, in combination with the
aforementioned liberalization of capital inflow /outflow policies, lured a large amount
for capital inflows and increased the stock of foreign debt. To further exacerbate the
problem, a large part of the foreign debt was not hedged against currency risks, because
stable exchange rates already minimized the inherited currency risks. In addition, most of
the capital inflow was coming from short-term international investors, who aimed only at
exploiting the low exchange rate risk. They were too fickle and mobile for the current
account deficit to count on as a solution. And it was clear that their herd-reaction
withdrawal in 1997 led to a large-scale depreciation of the Asian currencies. The volume
of inflow eventually exceeded current account financing and added to official reserve,
especially in the period right before the crisis in 1996. The following table provides a
summary of International Reserve held by different countries:
Table 6.3.1b - International Reserve (USD$billion)
1993-1995
1996
18.3
12.4
Indonesia
27.0
25.5
Malaysia
10.0
5.7
Philippines
37.7
29.9
Thailand
Source: International Monetary Fund, International Financial Statistics, vol. L, No.
(1997).
1997
20.3
26.6
9.8
31.4
12,
When exports slowed down from 1995 to 1997, expectations of devaluation started to
mount and short-term debts were not rolled over. That forced a huge capital outflow and
as well as depreciation. Stock market plummeted also because of extensive selling of
Asian equity.
-
83
-
In conclusion, one can group the reasons of the Financial Crisis of 1997 into three primal
factors: (1)
continual weak exports, (2) lack of monetary policy on current account
control, and (3) liberation of capital account. The following diagram is a representation of
the relationship among all factors:
Figure 6.3.1a
Continual Weak Export
Poor Control
over Current A/C
Liberation of
Capital A/C
-------------------------Export
Dropped
Liberation of
Capital A/C
High Current
A/C Deficit
Finance
Current A/C
Deficit
'
Capital Inflow
from Shortterm Investors
High Interest
Rate; Stable
Exch. Rate
I
Buildup
International
Reserve
Short-Tern
Debts not
rolled over
Expectation
of
Devaluation
Time
Capital
Outflow
Stock Market
Slump
Depreciation
of Currencies
6.3.2
End
Results
Effect
When exports started to decrease in 1996, GDP growth rate in Southeast Asian countries
dropped and fell below the overall regional (Asian) average. In 1998, the year right after
the crisis, Southeast Asia reported a negative 9.1% GDP growth rate; and in the
-84-
subsequent years, their growth rate remained below the regional average (see Table
6.3.2a).
Table 6.3.2a - GDP Growth Rate (%)
1996
Country
1998
1997
1999
2000
2002
2001
3.2
4.8
0.9
-13.2
4.7
7.8
Indonesia
0.8
8.3
6.1
-7.4
7.3
10.0
Malaysia
2.7
4.0
3.4
-0.6
5.2
5.9
Philippines
1.5
4.4
4.2
-10.8
-1.5
5.9
Thailand
-0.3
9.9
5.9
0.1
8.5
7.7
Singapore
2.4
5.2
3.2
-9.1
3.5
7.4
Southeast Asia
4.5
7.5
7.0
2.3
6.1
8.1
Asia
Source: Asian Development Bank online publications, Asian Development Outlook 2001
Update: Southeast Asia, (2002); World Bank, The World in 2002, (2002); ASEAN
Secretariat; ASCU Database; Asian Times, Asian Crisis Asia's economic outlook:
Overview 1 December 1999.
* Projection by ASEAN.
3.9*
3.1*
3.0*
2.5*
1.0*
3.3*
4.0**
** Projection by World Bank.
Nonetheless, as exports markets like the US sustained a reasonable demand in 1999 and
2000, most economies regained their robustness. Export growth has recovered a
significant portion of the pre-crisis level, at approximately 10% to 20% annually across
countries. In addition, current account deficit has been erased (see Table 6.3.2b).
Table 6.3.2b - Export Growth & Current A/C per GDP For Southeast Asia
1999
2000
1998
2001
2002
5.8*
-5.3
18.6
11.0
-4.7
Export Growth(%)
1.8*
2.8
5.9
6.7
4.7
Current A/C per GDP (%)
2001
Outlook
Development
Asian
Source: Asian Development Bank online publications,
Update: Southeast Asia, (2002).
* Projection by ASEAN.
GDP and export growth suggest reforms implemented by the governments have been
effective. Most reforms aim at conservatively rebuild the financial structure and eliminate
the shortcomings in the economic model that was exploited in the crisis, such as the
policy of increasing interest rate to maintain exchange rate, liberation of capital accounts,
or using short-term investment inflow to finance current account deficit (Kochhar,
Loungani & Stone, 2000). Among the reforms, the one that affects BOT the most is the
relaxing of foreign investment restrictions.
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Relaxing of ForeignInvestment Restrictions
Foreign investment liberalization has been an essential part of the reform led by the
International Monetary Fund (IMF). Countries are trying to separate short-term and
speculative investments from long-term FDI, then restrict the former and encourage the
latter, with investments in export-oriented or high-tech industries the most welcomed.
The drop in exports prior to the crisis displayed the lack of domestic infrastructure in
crisis-affected countries. Then the financial crisis itself exposed the weakness of the
countries' banking system. A country's ability to solve these problems will be crucial
determinants to its FDI in the near future. Laws are passed in different countries to allow
easier inflow of FDI. For example, the Thai government amended its Condominium Act
in 1998 to allow foreigners to completely own a local building (with a floor area limit). In
Indonesia, more sectors are allowed to receive FDI after policy changes in 1998. And in
Malaysia, limits on share of foreign ownership of factories were temporarily raised to
100%.
Impact on BOT
There are three issues related to the aftermath of the crisis that will positively affect BOT.
First, government spending in transportation may decrease in some countries because of
the weakened GDP, and the slowdown of local development. That in turn calls for a
higher degree of private
investment (see section 6.1 Privatization of Public
Infrastructure)to fill the void left by contracted government spending. Second, given the
impaired domestic banking sector in most economies, project finance will become a
sensitive topic and Project Companies will encounter difficulty in acquiring loans from
local banks. Singapore is in the ideal position to provide foreign, private financing
through BOT as a remedy. Third, as countries begin to realize the way in which the lack
of domestic infrastructure can bottleneck its manufacturing sector, some (the ones not
contracting government spending) will be more eager to build more infrastructures for the
sake of economic expansion. Infrastructure projects may also be used as a form of
economic stimulus. For example, according to Asian Development Bank (2002),
7
Section draws on article by Asian Development Bank, "FDI Inflows to the Crisis-Affected Countries,"
Asian Development Bank Publication, Stock No. 030101, (2001).
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Malaysia and Thailand have used 2.3% and 0.7% of their GDP, respectively, on
government-supported infrastructure projects in 2001 for the purpose of economic
stimulation. 7 As for the impact of the financial crisis on existing BOT projects in
individual countries, we have the following: 76
1)
Indonesia
Since most toll road projects that were under construction were partially financed by
revenue collected from existing toll roads, when the crisis stroke and the economy slowed
down and the banking sector collapsed, construction and land acquisition were forced to
halt in many projects.
2)
Malaysia
In view of the crisis, the Malaysian government was willing to renegotiate terms and
conditions of concession contracts with Project Companies. In December 1997, it invited
all project proponents that were negotiating concessions to submit alternative proposals
for restructuring their projects. Since Malaysia did not have as many running toll roads as
Indonesia did, it did not run into the financing problem brought about by the decreased
revenue from existing roads.
3)
Philippines
The Philippines was least affected by the crisis because, firstly, there had not been a high
level of speculative construction during the boom period in the early 1990's, and
secondly, its banking system was strong enough to maintain a high level of financing. As
quoted in a World Bank report (1999), "Ongoing toll road projects have seen no
construction suspensions or slowdowns as a result of the economic crisis." 77
4)
Thailand
Asian Development Bank, "Asian Development Outlook 2001 Update: Southeast Asia," Asian
Development Bank online publications, (2002).
76 This section draws on The World Bank Ministry of Construction, Asian Toll
Road Development
Program: Review of Recent Toll Road Experience in Selected Countries and Preliminary Tool Kit for
Toll Road Development (Japan: World Bank Publications, 1999), 1-4.
7 Ibid,.
7
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The crisis affected the strength of Thailand's banking sector and as non-performing loans
accumulated, banks were unable, or unwilling, to finance some infrastructure projects.
Thailand faced the same problem Indonesia had in having lowered revenue from existing
toll roads. Reduced revenue made debt repayment difficult.
Conclusion
The Financial Crisis of 1997 has affected quite a number of Southeast Asian BOT
projects. The general trends are that the governments are not willing to increase toll, and
banks are not willing or not able to finance new projects. That makes new projects
increasingly difficult to implement. Foreign, private financing is going to play an even
more important role in the current recovery scenario.
The financial crisis also changes the mentality of different parties. The governments will
now have learnt to properly handle the influx of international investment, to prepare for
the new knowledge-based competition, and to be more aware of the well being of the
general public. State enterprises are now exposed to international competition. Though
the financial crisis was devastating to local economies, it brought about a series of
reforms and regulations that will improve the business framework of affected countries.
With a better framework, a larger number of opportunities, and a welcoming policy to
foreign participation - all generated from the Financial Crisis of 1997 - Singapore is
presented a greater opportunity to penetrate these markets than ever.
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7.0
Implementation Schemes
Up to this point, we have analyzed the internal and external context of Singapore-led
BOT delivery. Now we will look into the action side of the business unit. Together, the
content of these two frameworks will transpose into Singapore's performance in the BOT
market.
Figure 7.Oa - Business Unit Strategy*
Context
" External: BOT is demand-constrained in the
transportation sector. Privatization of infrastructure
starts to take shape in the region.
" Internal: Singapore will have excessive E&C
services. E&C services need a consistent demand.
Services in general will erase dependence on
manufacturing.
0
Performance
Action
Implementation Scheme: strategy, market position,
deployment of assets
Idea draws on Garth Saloner, Andrea Shepard & Joel Podolny, Strategic Management
(New York, United States: John Wiley & Sons, 2001), 331.
Singapore should select a strategy which suits its consultancy and contracting firms, with
exportability, growth, and capability taken into consideration. In addition, that strategy
must have a balanced relationship between returns and risks, and be a value-added
proposition to all participated parties. We will first identify the different types of strategy,
then go through the selection process, and lastly, determine the E&C services capacity
and goals of Singapore.
7.1
Penetrating Strategies
7.1.1
Traditional, Project-based
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In the traditional, project-based approach, a Singapore firm (or an alliance of firms) will
bid for a BOT project. If the firm wins, it will be responsible for handling services of the
whole project, from planning and financing to construction and operation. Since the type
of services being
required from the Singapore-led
Project Company is very
comprehensive, this strategy allows a large amount of E&C services being performed at
Singapore. Some international BOT projects use services provided by local firms. Their
plan provides a certain degree of convenience, but negates a special feature of BOT, that
is, the ability to assemble a management team using the best talent in multiple
professions and at multiple locations.
Though this strategy generates the most employment opportunities in Singapore, the level
of responsibility and difficulty grow as well. Without local partnerships, the alignment of
interest and the financing of the project can be great challenges. Local contractors or
specialized
engineering firms hired may have different business agendas and
prerogatives. Plus, without a local presence in the Project Company, it will lack the
credibility to promote debt or equity financing in the host country. But because of its
relatively simple sequence and flexible exit strategy (investors can quit the BOT market
after one attempt), this strategy serves as a conservative way to enter a new market.
7.1.2
Traditional, Country-based
This strategy is the long-term and improved version of the project-based traditional
method. The two advantages it enjoys over the project-based approach are, first, instead
of migrating services back to Singapore, the Project Company can setup satellite offices
in the host country and may still use Singapore personnel to reduce operation cost and
generate employment for Singapore. If the Project Company works extensively in the
country, the initial cost of setting up overseas offices will be amortized. Second, the
Project Company can use existing toll collection to finance new projects. This new
financing source will expand the range of project Singapore businessmen can undertake.
Despite these advantages, this method involves a higher level of investment and hence a
more difficult exit scenario. Plus, the Project Company has to win a solid number of
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contracts to justify setting up satellite offices. As a result, this strategy may not be the
most suitable way to experiment a market.
7.1.3
Partnership, Project-Based
Partnership refers to a "cooperative and synergetic strategy for either carrying out a
particular project or building a long-term, trusting relationship" (McQuaid, 2000).
Depending on the role of involved stakeholders, partnerships can be classified into joint
venture operations and strategic alliances. The former emphasizes on gaining economics
of scale, meaning a larger, combined workforce will provide a lower unit cost. The latter
focuses on acquiring economics of scope. In a BOT project, both types of partnership can
be used. Strategic alliance among Singapore firms can produce a more capable and
versatile unit, whereas joint venture with companies in the host country can improve
capacity and network, as well as expedite the exchange of values and expertise. A
partnership strategy reduces the risk one party has to bear, yet the level of control and
profit have to be shared with other entities. In addition, finding a quality partner can be a
challenge if the market is short of capable firms.
When a Singapore-led Project Company decides to enter a project-based joint venture
with local firms, it has the privilege to select firms most suitable for that particular
project. On the contrary, in country-based joint ventures, where a Project Company enters
multiple BOT races with the same local partners, the partners have to adjust to the
projects instead of the opposite. Though project-based joint ventures possess flexibility in
partners selection, they may lack a long-term relationship with local firms that can help
drive down operating cost and handle politic issues.
7.1.4
Partnership, Country-based
A country-based partnership strategy means the same Singapore firm(s) will enter joint
ventures with the same local partners. This strategy helps Singapore firm(s) reduce cost
in a way that the local partner will provide local administrative or technical support.
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However, in order to make a long-term partnership attractive to the local firms, Singapore
has to obtain a large number of projects to create a sustainable job backlog. Given
Singapore is looking for long-term investments in the Southeast Asian BOT market, this
strategy can be a strong consideration.
7.1.5
Management Contracts
Singapore firms can buy the running BOT contract of an existing infrastructure, or a large
share of the Project Company, to enter the BOT market immediately. This strategy,
though has a low level of risk as most uncertainties have been unfolded, demands the
least of Singapore's E&C services and posts a low profit margin (because of its low risk).
When using this strategy, Singapore has to largely increase project volume to offset the
limited profit it can make in each project. For example, if Singapore makes a 2% profit
off management contracts, it will have to engage in $1000million dollar-worth of projects
to make $20million. The same profit can be achieved with smaller projects if other
strategies were used. Singapore firms should only use this strategy when they believe
they can run an existing toll road better than the current operator, and that they have
anticipated all possible latent problems. Furthermore, not every contract can be bought
due to political issues, and the buyer has to pass certain qualification requirements set by
the host government.
7.1.6
Purchasing Services from a 3 rd Country
The Project Company can purchase services from a third country and use Singapore as a
supervising body and launching location to serve the host country. Singapore will have
the least control in this strategy (performance of the
3rd
party is always less predictable
than that of the 1" party) and thus endure the highest risk. This strategy is also limited to
project-based implementation and cannot fit into a long-term scheme. It should only be
used when the
3 rd
party service provider produces the same product much cheaper than
Singapore firms do, and needs Singapore to introduce it to the Southeast Asian market.
Since Singapore is limited to only being a middle person and generates profit through
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marking up services, Singapore can hardly use this strategy to develop market presence.
However, once Singapore has developed credibility in its BOT services, it can consider
outsourcing its services to other countries to reduce production cost. Hence, purchasing
services from a 3
party is more suitable for market share expansion than market
penetration.
7.1.7
Merger & Acquisition
Merger and acquisition is the most versatile means for growth. For example, a developerled Project Company can buy a design-build firm to help handle its BOT programs in a
country. By doing so, the developer not only expands its core business, but also reduces
the risk of hiring an inept design-build company for its BOT projects. But merger &
acquisition also posts a high level of risk. First, when a firm is bought, its performance
and capacity under new management have always been questioned. Furthermore, the
work assigned to the newly bought firm may exceed or trail its capability, just as it
happens in all vertically integrated enterprises. Second, as far as strategic problems are
concerned, when a firm buys or merges with another, it unwittingly holds responsible to
another firm's liability. In a market where company transparence is low and political
connection prevails, one has to be cautious about merging or buying companies.
Merger & acquisition is appropriate only after Singapore has established its market
presence. Managing a BOT project while coping with a new wing of business can never
be an easy task. If the Project Company looks only for a local presence and connection,
joint venture operations will suffice. And if the Project Company wants only a local firm
to serve its BOT projects, it is not necessary for it to buy the firm's local work backlog as
well. In other words, merger & acquisition will benefit the buyer provided the buyer is
interested in the local market at-large and BOT is only part of its business, but never the
opposite.
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7.2
Strategy Selection
BOT in Southeast Asia has only become prevalent in the last two decades, and Singapore
has not managed any BOT toll roads in the region. Hence, Singapore should approach the
market conservatively. When deciding on which strategy to use, the city-state should
consider the following four questions:
1)
Does the strategy allow multiple Singapore firms to be the concessionaire?
As stated in section 4.2 The BOT Structure, a sole concessionaire Project Company can
hire different firms to perform different functional duties, but given the penetrating mode
which Singapore is in now, strategic alliances can strengthen the competitiveness of
Singapore on an international level, against some BOT players who already have existing
toll roads to finance and E&C personnel to serve new projects. A strategic alliance of
E&C service firms such as designers, bankers, contractors, and facility managers will
expend the repertoire of E&C services that the Project Company can provide internally.
Since a BOT project requires a high level of cooperation among and knowledge about
different trades, if the Project Company does not have a team of talents from different
professions, the lack of information about the executers - be they firms in the host
country, in Singapore, or in a foreign country - will put the Project Company in a
precarious position. Therefore, a preferred strategy should allow Singapore firms to
perform in a form of strategic alliance.
Management contracts do not require strategic alliance because most of the E&C services
are already done by the time the purchase takes place; only operational tasks remain and
strategic alliance will only create confusion among investors and dilution of profit.
Merger & acquisition does not coexist with strategic alliance by nature, because merger
& acquisition use new services of one company, whereas strategic alliance uses existing
services of different companies. Aside from these two strategies, all other strategies can
have multiple Singapore firms' participation.
2)
Does the strategy have local participation / representation?
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As stated to section 5.3 Extensiveness of BOT, despite the fact that involvement of
foreign firms in the concession market in Southeast Asia has been strong (91% of
concession value), the transport sector is slow in introducing pure foreigner-led Project
Companies. According to a study done by Kwak (2002), among the 14 concession project
failures in Asia to date, 11 of them do not have a joint venture or consortium.
Partnerships between Singapore's firms and local firms provide the Project Company
with the connection and management style that are needed to expedite E&C services,
commend leadership of the local work-force, and shed some of the political risk and
uncertainty. Hence, there is a strong incentive for Singapore players to joint venture with
local authorities or firms, at least at the present stage.
3)
Does the strategy generate a solid demand for Singapore E&C services?
A major goal of using BOT is making Singapore's E&C services exportable. In this
regard, the traditional approach and merger & acquisition will have most of services done
back in Singapore. (In merger & acquisition, services sold in another country still
contribute to the revenue of a Singapore firm.) On the contrary, in a joint venture,
management contracts, or purchasing services scenario, some of the services will be
performed, or have already been performed, in the host or a third country.
Aside from generating demand for services, whether the strategy uses existing services
can be critical as well. The traditional approach, joint venture, and management contracts
are using existing businesses of Singapore and the host country. Though alliances may be
formed among E&C service firms, the firms will not necessarily expand their repertoire
internally. Purchasing services and merger & acquisition, on the other hand, may create
new business divisions for a company. The above discussion can be summarized in the
following matrix:
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Table 7.2a - Characteristics of Different Strategies
High demandfor
Singapore E&C services
Existing
Business
New
Business
4)
0
Traditional Expansion
0
1
Merger & Acquisition
Low demandfor
SingaporeE&C services
0
Management Contracts
0
Purchase Services from a 3 rd
Party
Joint Venture
Does the strategy offer a favorable exit strategy?
A favorable exit strategy entails a low level of business commitment and financial
commitment. Examples of business commitment are setting up satellite offices and
merging with local firms to establish long-term business relationships. Business
commitment can reduce uncertainty, as the more involved the investor is, the more risks
are internalized and controllable by the extensive reach of the investor. But since
Singapore is still experimenting the market, excess business commitment can incur huge
financial losses if the market turns out to be unprofitable. Some other strategies offset
their lack of business commitment by increasing financial commitment. For example, in
management contracts, the investor will have to pay a high price to buy a running BOT
contract because the buyer has to pay for the business commitment the seller has
previously made. In Singapore's scenario, high business and financial commitments
should both be avoided. They can become part of the overall scheme if and only if
Singapore has secured a solid market share, otherwise, Singapore will lose a serious edge
in its exit strategy.
The answers to the above questions can be formulated into a matrix, which helps decide
the preferred strategy. A matrix of this kind is shown in Table 7. 1b on the next page. At
this market penetrating stage, a strategic alliance among Singapore E&C service firms,
plus a joint venture with local powers is the most desirable composition. Though it is a
niche market approach and will not be applicable to all projects, since the BOT
transportation market is currently demand constrained, Singapore can afford to choose
projects that fit its portfolio and general scheme. When the market conditions alter in the
future, the preferred strategy should change as well.
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Table 7.2b - Strategy Selection
Traditional
, Projectbased
Traditional
, Countrybased
JV*,
Projectbased
JV*,
Country
-based
Mgmt
Contracts
Purchase
services
from a 3rd
country
Merger
&
Acquisition
Yes
Yes
Yes/No
Yes/No
No
Yes
No
Yes/No
Yes/No
Yes
Yes
No
No
Yes/No
Does strategy
generate a solid
demand for
Singapore
services?
Yes
Yes
Yes/No
Yes/No
No
No
Yes
Does strategy
have a favorable
exit strategy?
Yes
No
Yes
No
No
Yes
No
Strategies
Factors
Does strategy
allow multiple
Singapore firms
to be the
concessionaire?
Does strategy
have local
participation /
representation?
*JV stands for joint venture.
Preferred answers are in bolded.
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7.3
Capacity & Goals
A kilometer of BOT toll road costs from USD$4million to USD$15million.78 A normal
75-kilometer highway may cost up to USD$700million. If it takes 4 years to plan and
build, each year the Project Company has to handle USD$175million of construction plus
E&C services. Since overseas BOT projects are more strategically involved, we assume
30% of the cost comes from E&C services. That means for one 75-kilometer toll road, it
requires about USD$50million of E&C services per year.
The average value of construction in Singapore from 1999 to 2001 is about
USD$9,000million a year (see section 3.1 Singapore'sSocial Structure & Construction).
Let's assume E&C services constitute 15% of this amount. Then the mean annual
capacity of E&C services is about USD$1,350million. As we argued in section 3.1
Singapore's Social Structure & Construction, the coming couple year may have a low
level of construction in Singapore and E&C services will have excess capacity. If we
assume local demand drops by 30%-40%, as in previous down cycles, then the amount of
E&C services available will be about USD$400-$550million. Given the numbers we have
calculated, this excess capacity is sufficient enough to handle about 600-800 kilometers
of toll road per year. This short run capacity of 600-800 kilometers stands only at about
10% of the length of toll roads that is being studied as of 1998 (see section 5.3
Extensiveness of BOT). This relatively small-scale participation goes perfectly with the
penetrating mode Singapore is in. Since Singapore is not broadly entering the market, it
can choose the projects which have the characteristics that fit its penetrating model,
instead of the opposite. But one should note that this assumed capacity is generated from
the anticipated excess supply of E&C services. If Singapore indeed wants to gain roughly
10%+ market share without the help of excess E&C services supply, it should expand its
E&C service industry by 25-35%.
78
Gregory Fishbein & Suman Babbar, "Private Financing of Toll Roads," RMC Discussion Paper Series
117, The World Bank, (1996), 4.
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Currently, construction accounts for 7%-10% of Singapore GDP, varying from year to
year; and Singapore's GDP is around USD$90-100billion. 79 If Singapore aims at using
BOT in Southeast Asia to boost its GDP growth, it will face the following scenarios:
Table 7.3a - Goals & Process
Growth in
GDP
Growth in E&C
Services
74%
1%
148%
2%
296%
4%
*E&C services assume to be
Methods*
Increase domestic
IncreaseBOT
contract amount
contract amount
by...
by...
CorrespondingBOT
market share in toll
roadsector
USD$3.3 billion
USD$6.7 billion
USD$6.7 billion
USD$13.3 billion
USD$13.3 billion
USD$26.7 billion
15% of domestic construction, and 30% of BOT.
15%-20%
30%-40%
70%-80%
The first scenario looks to be the most realistic, as far as E&C services capacity, BOT
contract size, and market share requirements are concerned. But growing domestic E&C
capacity by 74%, while maintaining its quality, in 5 to 10 years is still not an easy task. In
order to achieve this capacity growth, the government should make corresponding
policies, and E&C service firm should have the full understanding of the scheme and plan
of the city-state, and be prepared make expansion or consolidation changes internally.
7
CIA, World FactBook, (2002); US Department of Commerce, (2002); Asia Business Network website,
www.abisnet.com/singapore 2.htm. (1998); author's calculation.
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7.4
Risk Analysis
There have been numerous literatures on the risk analysis of BOT. For example,
Kumaraswamy & Morris (2002) have comprehensively listed an array of such texts in
their article "Build-Operate-Transfer-Type Procurement in Asian Megaprojects". Unlike
most of the conventional risk-analysis articles, which focus on the effect of risks on the
execution of BOT projects, this section emphasizes on how these risks may affect the
selection of strategy and approach of Singapore.
BOT projects are subject to multiple external changes which cannot be controlled by the
Project Company. The degree and frequency of these changes will determine not only the
viability of a market, but also the time of entry to that market.
1)
Change in economy
Just as what has happened to Southeast Asian countries during the financial crisis, any
sudden changes in the economy of the host country can affect the progress of ongoing
BOT projects, as well as the prospect of new BOT. The degree in which a project
depends on the economy is even larger if the project is financed by existing toll collection
or local equity / bond market. However, BOT investors should look at the long-term
prospects of a country instead of its short-term inconsistency, for BOT concessions
typically run from 20 to 30 years. Since Singapore does not rely on existing toll
collection and local equity / bond financing, economical changes should not seriously
affect its penetrating strategy and timing. But in an unstable economy, merger &
acquisition, management contracts would become more risky.
2)
Change in policies
This category includes changes in transportation policies, tax laws, environmental
protection laws, minimum wage laws, etc. Compare to other changes, these can be
controlled by the host government. Two methods to reduce the impact of these policies
changes are, first, having all sensitive policies fully understood, their management
discussed and detailed in the contract agreement to ensure a reliable working
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environment for the Project Company, and second, maintaining a high level of
communication between the host government and the Project Company throughout the
delivery period.
Though the host government may be put under intense pressure from the public to reform
tax laws, minimum wages and more, it should also be aware that building a reputation of
being cooperative and protective of private investments could attract more BOT
investments in the future. Therefore, it should not put pleasing the public in a short run
ahead of benefiting the country through foreign investment in a long run. Since policy
changes are controllable by the host government, Singapore should avoid entering
countries whose government does not show a corporative spirit. Changes in policies do
not affect strategy choice, however, they will determine the timing of Singapore's entry.
As mentioned in 4.2 The BOT Structure, Southeast Asia has been viewed as a region
whose market reform is ahead of political reform, therefore, Singapore should pay
attention to the readiness of a country (establishment of related laws, the reliability of the
government, etc.) before making an entry.
3)
Change in technology
Changes in technology may alter the sector of interest of Singapore. For example, if
Singapore's railroad technology becomes competitive in an international level, it may
consider exporting it in the package of BOT. Even in the currently presumed sector of
interest (the road sector), Singapore's competitiveness and capability in the BOT market
will still increase because of cheaper road building technology. Changes in technology,
nonetheless, should have no impact on choosing strategy and time of entry.
4)
Change in social perspective
Social perspective will be the biggest hurdle to be overcome when Singapore penetrates
through the Southeast Asian BOT market. Residents of the host country may not expect,
or accept, the fact that public services are being provided by a foreign, private company
which requires payment. Local partnerships will be encouraged in countries whose social
perspective lags market reform. Just as changes in policies, delayed entry may be
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necessary if locals are not ready to accept foreign participation (though recent data has
suggested it should not be a concern), and that the host government is reluctant to
promote privatization of national assets to foreign countries. We will summarize the
above discussion on external changes with the following matrix:
Table 7.4a - External Changes & Their corresponding effect on penetrating strategy
Strategy Selection
Timing
Sector ofInterest
Change in Economy
*
Avoid merger &
acquisition,
management contracts
Change in Policy
*
Delay entry if
country has unstable
policies
Change in
Technology
Change in Social
Perspective
*
*
Use local partnerships
*
Penetrate markets
where technology
gives competitive
advantage
Delay entry if social
perspective not
regulated by host
government
Conclusion
Despite there exists a solid market demand for BOT toll roads in Southeast Asia,
Singapore should approach the market with the appropriate commitment and timing; and
these two issues can be addressed by the selection of strategy and reaction to different
changes, as we have discussed thus far in this section.
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8.0
Conclusion
The three major driving forces of the global economy in the next decade will be
globalization, vertical integration, and privatization. Globalization is going to alter the
way Singapore's export-oriented manufacturing functions (as stated in section 2.0
Challenges & Opportunities); vertical
integration
and privatization of public
infrastructures are going to create a large demand for BOT projects (recall discussions in
section 5.3 Extensiveness of BOT and 6.1 Privatization of Public Infrastructures).
Together, these forces give a Singapore a great chance to use its already strong
consultancy and contracting services to become a prominent player in the Southeast
Asian BOT market. The sector of interest, employment of strategy, and adjustments to
social changes are studied in this paper (section 5 and 7). But since BOT requires a large
amount of effort and planning from multiple parties, the Singapore government may
consider taking an initiative in educating Singapore firms about the benefits that BOT can
bring about to the city-state and the way to approach the market. With the market
expanding so quickly and Singapore approaching only a niche market, there is a high
possibility that Singapore can use BOT to revive its E&C service industries, as well as its
economy. BOT toll roads have been growing dramatically in the last decade but the
market is still far from mature and efficient. Laws and market reforms are still sorely
needed, and foreign players have been so lacking in the business that market efficiency
has yet to be attained.
This paper focuses only on the greater scheme of BOT and provides readers with a brief
evaluation of Singapore's potential role in the market. Further research can be done on
the process and policy that will turn BOT into an economy driver for Singapore.
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9.0
Appendix
A-1.
Tariff Reduction in selected Asian Countries
Table Al - Tariff reduction in selected Asian countries
Average Tariffs (%)
1986
Indonesia
18.0
Malaysia
10.8
Philippines
21.4
Singapore
0.8
Thailand
31.7
Source: World Bank, World Development Indicators (1997).
A-2.
1993
19.4
14.3
20.0
0.5
12.1
Structure of Imports from & Exports to the United States
Table A2 - Structure of Imports from & Exports to the United States
In millions USD
1997
1998
1999
2000
2001
1-Digit SITC Commodity
Imp Exp
Imp
Exp
Imp
Exp
Imp
Exp
Imp
Exp
0 Foodand Live Animals
1 Beverages and Tobacco
2 Crude Materials,Inedible, Except
Fuels
3 MineralFuels, Lubricantsand
Related Materials
4 Animal and Vegetable Oils, Fats and
Waxes
5 Chemicals and Related Products,
N.E.S.
6 ManufacturedGoods Classified
Chiefly by Material
7 Machinery and TransportEquipment
8 Miscellaneous ManufacturedArticles
9 Commodities and Transactions,
N.E.S.
236
105
131
2
175
105
120
3
176
72
92
2
205
80
102
3
203
54
88
2
84
18
70
23
99
62
77
24
63
12
194
134
109
173
282
187
311
368
475
203
20
3
17
7
12
4
10
4
4
4
1578
726
1216
374
1409
630
1634
706
1471
925
*
Total * (In billion USD)
838 131 636 134 646
99 724 119 558 105
11811 17221 10751 15617 10771 14857 11853 15251 12562 11256
2358 958 2081 1103 2246 1195 2350 1324 1742 1270
503
745
512
804
533
1060
573
1286
557
1115
17.7 20.1
15.7
18.4
16.2
18.2
17.8
19.2
17.7
15.0
Source: US Census Bureau, Foreign Trade Division, Data Dissemination Branch
-104-
A-3.
Quarterly Singapore Property Market Indicators
Table A3 - Quarterly Property Market Indicators
97Q2 97Q4 98Q2 98Q4
99Q2
99Q4
00Q2
00Q4
01Q2
Office Occupancy
92.1
91.5
90.3
87.7
87.3
87.6
90.4
95.0
91.6
(%)
108
118
122
94
100
143
122
100
150
Office Price Index
(98Q4=100)
93.2
92.9
91.0
90.4
91.0
91.8
92.0
90.9
Residential Occupancy 91.7
(%)
117
132
139
131
127
Residential Price Index 164
150
126
100
(98Q4=100)
-31.2 -16.6
-79.6 -37.6 27.8
-7.7
16.7
37.0
-120
Private Sector
Construction Growth
(%)
Source: Jones Lang LaSalle, Asia Pacific Property Digest (various issues); Building and
Construction Authority (BCA) of Singapore; Urban Redevelopment Authority (URA)
Releases Quarterly Real Estate Information; Goldman Sachs Asia Economic Research
Group, Asia Economic Analyst, issue no. 98/15, 26 May 1998; Singapore Department of
Statistics.
A-4.
01Q4
88.7
99
91.8
117
N/A
Deduction logic for Asset Market Supply
Figure A4
Price
New Demand
Old
Demand
Old Supply
New Supply
Small change
in price
--------
----
Quantity
Large change
in quantity
Figure A4 is a simple economics "Supply-Demand" graph demonstrating a scenario in
which a large change in demand and a small change in supply - conditions of a recovery
from a recession - can lead to a large amount of goods sold but with relatively stable
prices. We observed an increase in demand and number of transactions, and a relatively
low increase in office price in 2000. Therefore we can deduce the supply during the same
period must be low.
-
105
-
A-5.
Time-serial regression results of Contract Amount in Singapore
The linear regression goes as follows:
Contract Amount(t) = 2795.6 + 0.328*Contract Amount~t)
(738.8) (0.16)
Standard errors are in parentheses. The linear regression has an R2 of 0.107, a t-stat of
1.95, and a p-value of 0.059 for coefficient 0.328. We will reject the hypothesis that one
can predict the construction level of Singapore based on results of the previous quarter.
Figure A5 - Time Serial Correlation of Quarterly Contract Amount
90008000
CY
7000
,
*
61000
.0
oY
,
,
500.0
*
4000
3000
*
2000
2000
3000
4000
5000
6000
7000
8000
Quarterly Contract Amount (S$MM)
Source: Building & Construction Authority of Singapore (BCA).
-106-
9000
A-6.
Top International Transit and Railway Turnkey System Contractors selected by
Jane's Asian Infrastructure Monthly
Table A6a -
Company
Top International Transit Turnkey System Contractors selected by Jane's
Asian Infrastructure Monthly
Company
Alstom
Balfour Beatty Rail Production Inc.
Bombardier Transportation
Source: Jane's Transport Library
Table A6b Company
GE Transportations System
KOROS
Siemens Transportations System Ltd.
Top International Railway Turnkey System Contractors selected by Jane's
Asian Infrastructure Monthly
Company
Alcatel Canada Inc.
Alstom
Ansaldobreda
Balfour Beatty Rail Production Inc.
Bombardier Transportation
Chemetron Railway Production Inc.
Davy British Rail International Ltd.
Dimetronic SA
Interinfra
KOROS
Source: Jane's Transport Library
-107-
Marconi Communications
Mecanoexportimport
Parsons Brinckerhoff
Ranalah
SAGEM SA
SAT
Scitel Telematics Ltd. A
Siemens Transportations System Ltd.
A-7.
Major Construction Bids Announced (1999/1-2002/5)
Tables A7 - Major Construction Bids Announced (1999/1-2002/5)
Major Construction Bids Announced
Year 1999
Type
Thailand Philippines
1
Environment
Bridge
Highway
Road Works
Water Supply
Water Works
Airport
* National Road Improvement
Cambodia
Laos
Cambodia
Laos
4
3
2
1
Thailand Philippines
Indonesia
Malaysia
Vietnam
1
*1
1
1
2
1
4
I
1
Major Construction Bids Announced
Year 2001
Thailand Philippines
Indonesia
Highway
Urban Transit
*3
2
Road
Railway
Water Supply
Water Works
* Metro-Manila Urban Transport Integration Project
# East-West Corridor
Malaysia
Vietnam
Cambodia
Laos
#1
1
3
I
2
1
1
1
Major Construction Bids Announced
Year 2002
Type
Vietnam
Major Construction Bids Announced
Environment
Bridge
Highway
Urban Transit
Road
Road Works
Water Supply
Water Works
Airport
* Asian-Euro Highway
Type
Malaysia
*1
2
Year 2000
Type
Indonesia
Thailand Philippines
Indonesia
Environment
Bridge
Highway
1
Road
Railway
1
Water Supply
Water Works
Airport
1
Source: Jane's Transport Library (CD-ROM)
-
108
Malaysia
Vietnam
I
-
Cambodia
Laos
A-8.
Regression results on demand for Transport Systems
Data used:
Table A8 - Selected Developed/Developing Countries Profile
Area (km 2)
Highway (km)# Railway (km)#
Country
Exports
(USD$MM)*
Population
(MM)
434,333
378,000
23,654
1,152,207
Japan
61,000
7,687,000
33,819
913,000
Australia
149,867
98,000
3,124
87,534
S. Korea
543,100
357,000
44,000
656,140
Germany
49,033
342,000
4,012
91,180
Norway
94,633
41,000
4,358
71,059
Switzerland
276,033
244,820
16,878
371,603
UK
306,233
547,030
31,939
892,900
France
43,033
337,030
5,865
77,796
Finland
Source: CIA, World FactBook 2001; World Trade Organization; National Statistics
MRETS, UK.
*Unless otherwise noted, figures are for year 2001.
* Average annual figures from 1998 to 2000.
127
19
22
83
5
7
60
60
5
Regression Results: random variables are in bolded. "t-stats" are in parentheses below
coefficients.
1)
Highway (Hwy) & Railway (Rwy) vs. Area (Area) & Population (Pop)
Hwy (km) =
Rwy (km) =
Conclusion:
2)
-11,348 +
(-0.13)
R2 =0.95
3,972 +
(0.68)
R2 =0.80
0.1*Area (km 2 ) +
(4.28)
0.003*Area (k2)+
(2.13)
8801*Pop (MM)
(6.45)
254*Pop (MM)
(2.79)
Area & Pop are statistically significant to Hwy, but only Area is
statistically significant to Rwy.
Highway (Hwy) & Railway (Rwy) vs. Area (Area) & Population (Pop) &
Exports (Exp)
Hwy (km)= 3628 + 0.1*Area (km 2)+ 9681*Pop (MM) - 0.231*Exp ($MM)
(-0.27)
(2.73)
(3.66)
(0.03)
R2= 0.95
-109-
-3308 + 0.004*Area
(-0.96) (5.27)
R = 0.96
Rwy (km)
Conclusion:
3)
(kM2) -
174*Pop (MM) + 0.11*Exp ($MM)
(-1.56)
(4.23)
As confirmed in the first regression, Area & Pop are statistically
significant to Hwy. Newly added Exp is not significant. Area is
statistically significant to Rwy as before. But Exp is also significant.
Notice that Pop changes signs, which means it cannot be a determining
variable.
Railway (Rwy) vs. Area (Area) & Exports (Exp)
Rwy (km)
Conclusion:
=
-2,287 + 0.004*Area (km2 )
(-0.61) (4.54)
R = 0.94
+
0.07*Exp ($MM)
(6.04)
As confirmed in the first two regressions, Area and Exp are significant to
Rwy.
-110-
A-9.
World Bank & Asian Development Bank lending to Asian borrowers by Sector
Table A9a - World Bank Lending
World Bank lending to borrowers in East Asia & Pacific
By sector, 1992-2000 (USD$MM)
Sector
Avg. 92-97
1998
1999
2000
Total
500
104
557
5
3,666
1,292
847
100
470
9,169
Finance
106
5,385
826
32
6,879
Telecommunication
181
35
100
0
1,221
1,148
137
2,141
5,505
1,110
88
2,054
9,623
1,042
450
*6,690
9,765
629
350
1,493
2,979
9,669
1,710
23,083
55,397
Education
Electric Power & Energy
Transportation
Water Supply
Others
Total
Source: The World Bank, Annual Report 2000, (2001).
*Economic Policy accounts for USD$3,612MM.
Table A9b - Asian Development Bank Lending
Asian Development Bank lending to borrowers in East Asia & Pacific
By sector, 1992-2000 (USD$MM)
Avg. 92-97
1998
1999
2000
Total
874
1,251
979
N/A
1,238
1,286
609
2,167
N/A
1,151
1,108
775
609
N/A
1,274
1,011
851
266
N/A
1,224
8,648
9,741
8,913
N/A
11,077
667
609
637
692
5,937
437
948
1,135
5,445
6,768
5,538
Source: Asian Development Bank, Annual Report 2001, (2002).
Data of this table is 3-year running averages.
1,278
5,323
5,981
50,297
Sector
Social Infrastructure
Energy
Finance
Telecommunication
Transportation
Agriculture
Others
Total
- 111 -
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