Speech by Mr Tharman Shanmugaratnam, Deputy Prime Minister and Minister for Finance the launch of the Clifford Capital

Mr Kai Nargowala,
Distinguished guests,

1. Thank you for inviting me, and let me first add my thanks on top of what Kai had said, thanks to the shareholders, the management team and staff, and everyone who has contributed to making Clifford Capital possible. It is a valuable addition to the ecosystem for infrastructural and project finance in Asia.

2. I am optimistic for Clifford Capital and the companies it will serve. We know about the demand for more and better infrastructure. The demand is in fact much larger than anything that can be met by financial institutions in any one centre. The ADB and World Bank have made estimates, but it is tremendous demand in every area - power, telecommunications, water and even basic infrastructure like sanitation, and everything to do with the infrastructure for modern urban living for a growing middle class in Asia.

3. But there are constraints. It is these constraints that we were minded by when the Economic Strategies Committee in 2010 recommended the setting up of a commercially-driven project finance vehicle in Singapore.

4. The first constraint which we saw then and is still with us is the fact that the European banks, which have been prominent in project finance globally as well as in Asia, are deleveraging. This may continue for some time. Compounding that is the fact that in global banking generally, there is increased aversion towards large projects and long term tenures. Basel III and the risk weights it implies make it more costly for banks than before.  There is reduced appetite for long term bank finance. 

5. Secondly, within Asia itself, the financial markets are still relatively undeveloped when it comes to long term finance. Asian banks are developing their capabilities for project finance. The Asian capital markets too are not as developed as they are in the US and Europe. The market for project bonds and hedging instruments such as long-dated currency swaps is not deep and the instruments not as actively traded. So we are still at the stage of developing these markets. It should not be a long term constraint, but for now it constrains the availability of capital to meet the demand for infrastructure.

6. The third constraint is in the fact that emerging country governments are themselves developing their capabilities to structure private-public partnerships and tenders in a bankable and sustainable fashion. This too should not be a limiting factor in the long term. 

7. We are well placed to catalyse the development of infrastructure finance. The community here - of financial institutions, multilateral development institutions, government bodies, infrastructure specialists and now Clifford Capital - is well placed to catalyse the development of infrastructure finance in Asia and to some degree in the emerging world beyond Asia as well.

8. There are four assets that we have in this regard, that allow us to play this role. First, we have solid companies that are anchored in Singapore, with strengths in one part or another of the infrastructure value chain. Companies that are strong in architectural design, in technology development, in project implementation, and in EPC (or engineering, procurement and construction). We have local companies - Hyflux, Surbana, Singbridge, Keppel, Sembcorp, PSA and several others. We have foreign companies who are rooted in Singapore and are growing out of Singapore - including MNCs with strong infrastructural capabilities like GE for instance.

9. Importantly, these large local and foreign players can help Singapore-based SMEs who are part of their supply chains to gain access to emerging markets when they obtain contracts. And as the SMEs familiarise themselves with these markets they can hopefully take on niche projects of their own in time to come.   So that is the ecosystem: large local companies, foreign companies, and the SMEs who have niche strengths in various parts of the infrastructure value chain.

10. A second advantage that we have is in the fact that although global banks are deleveraging, they are basing their project finance expertise in Singapore. Several of the large European banks have based their project finance teams here. Together with the multilateral development banks - the World Bank including the IFC and MIGA, and the ADB - they will play a very positive role.

11. Plus the fact that on the softer side, we have been developing platforms for thought leadership and for new concepts in infrastructure projects and finance to be developed - concepts developed by both the public and private sectors. Foreign government officials have come frequently to Singapore to meet up with our financial institutions, meet up with the World Bank and the ADB. These platforms that we are developing – open and neutral – are playing a helpful role.

12. The MAS is keen to develop further the markets for infrastructural and project finance. We are the only place in Asia with a Business Trust Framework. Essentially, what this does is to allow asset owners to recycle their capital into new projects via the equity market, by attracting new private capital. That is a valuable role that the capital market can play. We have three infrastructure business trusts already listed on the SGX and we are looking at promoting other vehicles and other instruments like project bonds as I have mentioned. These are different ways to ‘crowd in’ more private finance.

13. Let me say a few things about the role of the Government in this new venture. It is something we spent some time considering. What is the appropriate role of Government vis-a-viz Clifford Capital? We have been very careful from the start to ensure that Government does not get involved in direct provision of project finance. We want to catalyse, not ‘crowd out’ private financial institutions. We have also wanted to avoid distorting the commercial incentives that Clifford Capital and its partners amongst financial institutions must be driven by. And thirdly, we don’t want to find ourselves in a situation some years down the road where there is a continuing drain on the public purse. We have seen that in the case of EXIM banks in some other countries.

14. I should add that project finance is different from trade finance in this regard. The risks are much lower in trade finance. The Government has found it can add value and plus a small gap in the markets by providing subsidised access to trade finance for Singapore SMEs. For instance through our Loan Insurance Scheme and Trade Credit Insurance Scheme, we provide a subsidy for the insurance premiums that SMEs have to pay to obtain financing.

15. Project financing is different. It is longer term, it has higher risk to the public purse, and we want to be exceptionally clear upfront that this has to be an arm’s length relationship between the Government and Clifford Capital. Clifford Capital will be run on purely commercial lines.

16. So what form of support is the Government going to provide to Clifford Capital? We have looked at some countries. The forms of support that governments provide include debt guarantees, liabilities guarantees, direct capital injections to EXIM banks, loans and even operating subsidies. Some of these relationships pose moral hazard, because they risk undermining the commercial discipline of an EXIM bank.

17. We are therefore not copying any particular model wholesale. We have decided on a clean and sustainable arrangement, where the Government only provides a guarantee on the debt that is issued by Clifford Capital. That way we keep an arm’s length relationship. It is also capital-efficient because the Government is not putting up capital upfront, but is able to give Clifford Capital the benefit of borrowing with the backing of the Government’s AAA rating. I should add that in the very unlikely event that the guarantee is triggered, the Government after paying the creditors is entitled to recover amounts from the company, similar to if we had given a loan to Clifford Capital.

18. I thought I should explain these considerations briefly. We want to set things right at the outset in the Government’s relationship with Clifford Capital, so that this is a sustainable relationship.
 
Concluding remarks

19. I have painted the broad brush strokes of the infrastructure ecosystem that we are developing in Singapore. Clifford Capital and the partners that it will work with are going to add a valuable piece to this ecosystem of infrastructure providers amongst our corporates, financial institutions, the multilateral development banks and professional experts. 

20. Well before this place was called Clifford Pier, I understand the area around it was called “Tanjong Tangkap”, starting from where the Maybank building is today. For the non-locals here - “Tanjong Tangkap” translates to a promontory where you get a catch. That logo for Clifford Capital behind me indeed looks suspiciously like a fishing net. But it was called “Tanjong Tangkap”, according to historians, because this was the place where you could catch the captains of vessels. So I wish Clifford Capital all the best as it seeks to catch the captains of our enterprises that are now venturing abroad. And seeing that there are so many potential corporate clients here, I also wish you the very best as you seek to ‘tangkap’ Clifford Capital.