Wednesday, 24 December 2014

PPP: Promised partnerships (can) prosper

The sorry saga of the grass pitch at the Sports Hub has put public-private partnerships in the spotlight. But such PPPs can prosper with the right structure.
By Chia Yan Min, The Straits Times, 23 Dec 2014

IT WAS meant to be a gleaming homage to Singapore sport, and a testament to the success of partnerships between the Government and the private sector.

Instead, the $1.33 billion Singapore Sports Hub has become better known for its travails, mainly the dismal state of its pitch.

It is among the world's largest sporting infrastructure projects developed by a public-private partnership (PPP): In this case, government agency Singapore Sports Council (now Sport Singapore) and Singapore Sports Hub Pte Ltd (SHPL), a consortium of firms that runs the 35ha facility in Kallang.

The consortium designed, built and operates the facility, in return for an annual payment from the Government throughout the project's 25-year term.

The Government said it chose the PPP model not because it is "short of funds, but because we believe in the benefits that a PPP arrangement can bring".

But the model has now come under fire, given the problems that have plagued the Sports Hub's development from the outset, including funding difficulties and completion delays.

More recently, complaints from international athletes about the state of grass on the pitch led to ire from the public, with some questioning the lack of accountability and coordination between the consortium and the government agency.

Events had to be rescheduled and urgent repairs were made to remedy the surface in time for sporting events, leading to what Singapore Sports Hub chief operating officer Oon Jin Teik admitted were "substantial costs".

While there were exit provisions in the partnership, the Government has made clear these were not being considered.

Last Saturday, SHPL said it would opt for a new, all-natural grass pitch, instead of relying on its problem-plagued hybrid one. It promised to absorb the costs involved and not pass them on via ticket sales to future events.

The sorry saga over grass serves as a reminder that not all PPP projects go as planned.

But given Singapore's aspirations to become Asia's infrastructure and project financing hub, it should not serve as a deterrent either.

Outsourcing risks to private sector

FOR one thing, there are still clear benefits to the PPP model.

Under such an arrangement, the public sector works with private firms to design, plan, finance, construct and operate projects traditionally provided by the Government, such as infrastructure and utilities.

The Government outsources financing, construction and operation of the facility to the private sector, leaving it free to focus on its role of policymaking and protecting the public interest.

This way, construction and operation risks are shifted out of the public sector to the consortium and banks that have provided loans.

Mr Mark Rathbone, Asia-Pacific capital projects and infrastructure leader at PwC Singapore, said PPPs limit governments' exposure to cost overruns and delays when purchasing services and assets through performance-based contracts.

"This can improve the project's quality, efficiency and, in some cases, lower costs," he said. While looking good on paper, the PPP model has had a patchy track record in Singapore since it was adopted here in the early 2000s.

The first PPP here was a $250 million desalination project partnership between national water agency PUB and Hyflux-led consortium SingSpring in 2003.

A year later, the Finance Ministry unveiled its PPP Handbook, recommending the model be considered for all state projects which require the development or redevelopment of capital assets costing more than $50 million.

Since then, successful forays into PPP include utilities-related projects; the construction of vocational training school ITE College West; and TradeXchange, which allows companies in the trade and logistics sectors to exchange information and synchronise data securely.

On the flip side, the $380 million Changi Motorsports Hub PPP failed to materialise, after the consortium behind it ran into financial difficulties.

No public funds were invested in the project.

The National University of Singapore's (NUS) University Town @ Warren PPP was cancelled in 2007. It was originally planned to be operated by a private sector entity but, in January 2008, the Government said it would be owned and funded by NUS. No clear reason has been disclosed for the shift.

A Singapore Management University student hostel PPP has been on hold since 2008.

Success factors

WHAT makes a PPP succeed and others fail?

First, a well-defined project with clear allocation of roles, risks and responsibilities between the public and private sectors is a prerequisite for a successful PPP, said Mr Sharad Somani, KPMG's Asia-Pacific head of power and utilities.

Agencies like the PUB and the National Environment Agency have been able to implement successful PPP projects mainly because of the standardisation of structures and contracts that come with time and experience, he added.

Second, size matters.

Singapore's small market size can be an impediment to cultivating the expertise and flow of deals necessary for a thriving PPP market. PPP players prefer to see a pipeline of similar transactions developed within a consistent framework. This way, investors can build on previous experiences and achieve greater economies of scale on similar projects.

Singapore's small size means most of its deals are not large enough to attract investors, particularly global ones.

The diversity of PPPs implemented here so far has also resulted in a lack of critical mass, except in sectors like utilities.

A clear pipeline of future deals is crucial for drawing and developing a pool of PPP experts here - which, in turn, is necessary to build knowledge for export to Asia's growing PPP markets. One way to get around the size issue is to bundle similar projects together for greater economies of scale.

There is also scope for government-linked companies (GLCs) to play a role. Some of Singapore's successful utilities PPPs were spearheaded by companies such as Sembcorp, Keppel and Hyflux. GLCs in other sectors - property developers, construction firms, and telcos, among others - too, play a larger role in the PPP space.

Over time, their home-grown expertise in project development and financing can be transplanted elsewhere in the region.

As for the Sports Hub PPP, this is seen as a particularly tricky partnership, especially since Singapore does not yet have a "clear and recognisable" revenue stream coming from sports events, in the words of a 2010 Civil Service College study.

Countries such as Australia and Britain, which have hosted several successful sports PPPs, have a strong sporting culture, lending confidence to financial institutions which can be certain of a return on their investment.

Still, for all its troubles, it is too early to consider the Sports Hub a failed PPP, especially since there are few precedents to measure it by.

While it is fairly straightforward to measure the cost effectiveness of a desalination plant, it is less easy to gauge the success of a stadium, which must take into account hard-to-define factors such as user satisfaction.

PwC Singapore's Mr Rathbone noted that a significant amount of work went into determining the reasons for and benefits of using the PPP model for this project.

"There have been far more complex and challenging projects that have been successfully delivered through PPP," he said.

"This project was structured using best practices from the most mature PPP markets. It is 'best practice', it is market leading."

The Sports Hub's problems should not deter the public, nor the private sector, from pursuing PPP opportunities in other areas, or indeed, in the sporting arena.

Instead, more momentum is required in Singapore's PPP market, in order to build up a pool of PPP expertise here. That will help boost Singapore's aspirations to become Asia's infrastructure and project financing hub.

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