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Financing via Business Trusts
This article is published in The Business Times on 20 September 2013
Wider acceptance of these trusts could go a long way in providing capital for infrastructure in Singapore
and the region
AS INVESTMENTS go, they don't get much bigger than infrastructure projects. Whether it is broadband
networks, urban rail or utilities, the projects can run into billions of dollars.
Over the past decade, Singapore has become one of the fastest-rising stars as a leading hub for
infrastructure project finance in the region.
Some of the leading global and regional names in the business with project finance operations here
include Standard Chartered Bank, Bank of Tokyo-Mitsubishi and DBS.
More recently, the arrival of Clifford Capital in Singapore has also signalled the deepening of financing
options available for infrastructure financing.
It is significant that as a rapidly growing finance hub, Singapore not only hosts the teams that do the
infrastructure deals, but is also home to significant projects.
The Marina Bay Sands and Resorts World Sentosa integrated resorts, coming in at S$5.4 billion and S$6
billion respectively, are two examples and were among the largest financing deals in the Asia-Pacific in
2008. Other major domestic infrastructure projects such as Changi NEWater, National Broadband
Infrastructure, Sports Hub and the Singapore Power Cable Tunnel also testify to Singapore's vibrant
infrastructure financing market.
However, one irony in financing infrastructure projects remains that these projects have been unable to
tap the huge pool of domestic savings in the region. Insurance companies and pension funds are good
sources of funds, and will benefit from the long-term investment profile and steady returns offered by
infrastructure assets.
There is huge business potential for the capital markets, if they are able to unlock this new source of
financing for infrastructure projects. At the same time, it could also fill the gap that is expected with the
implementation of the Basel III accord which would constrain the appetite of commercial banks for
long-tenure project financing.
In Singapore, the business trust model is a vehicle that has the potential to help monetise infrastructure
asset investments, and also get public funding into risk-contained infrastructure assets.
Introduced by the Monetary Authority of Singapore in 2004, a Singapore business trust is an investment
vehicle structured so that a single company, known as the "trustee-manager", holds and operates
business enterprises for the benefit of its investors, beneficiaries who are unit holders.
While investors do not have any operational control or shareholders' rights, they benefit from the steady
dividend stream. The trustee-manager is also professionally managed, and reports to the board which
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comprises primarily independent directors. In this way, the fiduciary responsibility to beneficiaries is
placed squarely on a single trustee-manager. This model supports strong governance and efficient
management processes - qualities that appeal to potential investors, as their interests are paramount.
For investors, infrastructure projects are often highly attractive investments. Besides often good returns,
they offer, perhaps more importantly, stable returns.
At a time when bank deposits rates offer less than one per cent in interest, business trusts are generating
returns of between 5 and 8 per cent. This profile is also appealing for its potential ability to tap the huge
pool of long-term savings residing in pension funds across Asia and the world.
Infrastructure developers can also reap significant benefits from using business trusts, offering an efficient
and effective tool for monetising their investment. At the same time, project assets continue to be
operated per contractual commitments with the government off-taker.
Monetising their investment has the added benefit of freeing up capital to be recycled into new projects.
Business trusts also offer developers other important advantages, especially for capital-intensive projects
such as infrastructure. For instance, they can pay dividends out of cash flows instead of from accounting
profits.
In businesses where depreciating assets can often suppress accounting profits, this adds a valuable
element of flexibility to their operations.
Furthermore, unlike real estate investment trusts, which are limited to a gearing of 35 per cent of
deposited property (60 per cent if rated publicly), there are no restrictions on gearing levels.
Business trusts can also tap debt markets to support their activities as a funding alternative to issuing
additional units in the trust, or outright commercial loans.
Business trusts are starting to garner the attention they deserve. In the past year alone, five have listed
on the Singapore Exchange, bringing the total to 12 and raising the total market capitalisation of
Singapore business trusts to S$19 billion.
However, this is still insignificant when annual project financing in the Asia-Pacific totals some US$75
billion. Given that the Asia-Pacific region needs US$8 trillion of infrastructure investment as per Asian
Development Bank's estimates, a capital market solution like business trust could go a long way in
addressing the funding constraint expected in the years ahead.
The challenge now is to make business trusts a more attractive option for parking operating infrastructure
assets. This in turn increases the ability of developers to undertake more infrastructure project
development.
In their own right, business trusts are under-utilised - perhaps even under-appreciated financing vehicles.
An investor awareness programme, along with having more highly credible projects being structured into
business trusts, can go a long way in building investor confidence.
In this respect, the divestment of the Senoko incineration plant into a business trust (K-Green Trust), and
the recently proposed divestment of OpenNet's fibre optic passive infrastructure to NetLink Trust, are
worthy of special mention.
What is interesting about these trust structures is that the infrastructure assets are controlled and
operated by the trustee manager and not the trust that holds or owns them.
Irrespective of the trust ownership structure, the independent trustee manager structure therefore
ensures that the operations of the assets are aligned with the aim of maximising value for unit holders.
Several Singaporean infrastructure developers and owners have also opted for the business trust
structure.
Among them is Keppel Integrated Engineering, whose K-Green Trust runs its incineration plant in
Singapore and offers investors an opportunity to invest in "green" infrastructure assets.
Another is the CitySpring Infrastructure Trust, which was the first infrastructure business trust registered
with the MAS and sponsored by Temasek Holdings. Its infrastructure portfolio is focused on utilities,
transportation and logistics and communications. Projects include City Gas, SingSpring, Basslink Telecoms
and CityNet.
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True to its regional hub status, several of the business trusts in Singapore are for projects abroad.
Singapore was also chosen over Hong Kong by Hutchison Whampoa for the listing of its Hutchison Port
Holdings Trust in 2011.
India also stands out in this regard, with Indiabulls Property and Religare Healthcare business trusts as
examples of several trusts focused on the Indian market.
Wider acceptance of business trusts as a financing mechanism for infrastructure projects could go a long
way in providing capital for the infrastructure needs in the region.
Singapore has the ability to offer the complete ecosystem for infrastructure project financing - bankable
project structuring precedence, developer presence, network of advisory firms, financing institutions and
capital markets solutions.
Successfully tapping capital markets using business trust structures can play an important role in
sustaining infrastructure growth, and in cementing Singapore's position as the leading project finance hub
in Asia.
This article is contributed by Mr Sharad Somani and Priyanka Mehrotra. They are partner and
assistant manager, Global Infrastructure Advisory, at KPMG in Singapore respectively. The views
expressed are their own.
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