Microgrids & resilience

Networks are powerful, they amplify signals and messages, create effects that anchor and entrench products and players. When we have a power plant and a network supplying power to a lot of households, we gain from economies of scale, the higher power available unlocks higher consumption of electrical appliances, increases our productive hours and amplify the wonders of having electricity.

It also means that if that power plant fails, you’ve a blackout. Not just you but across the network. Expanding the network, putting more plants on it enhances resilience to an extent – so much so we have taken our network’s reliability for granted.

But guess what, power networks are going to be less stable. Intermittent sources of electricity from wind and solar power, as well as decentralised generation of power reduces the predictability of power flows and makes it harder for the system to operate smoothly in matching demand and supply. Huge mismatches will cause outages and when that happens, can your decentralised generation actually help you? Do you have “island” capabilities on your microgrid?

A microgrid that has capabilities to disconnect from the main grid and supply itself is powerful – even if the supply is just to sustain the system for some time. That enhances resilience. In life as well, it makes sense to acquire another skill on the side, make friends from beyond work and save up significantly, to achieve this resilience. Too often we are silently being lulled into being dependent on the mammoth bureacracy and system built around us we think we don’t need the island capabilities anymore.

Consuming Housing

With working from home becoming a norm following Covid-19 pandemic outbreak, there’s going to be major shifts in infrastructure one might start to expect and consider as one thinks about entering a career in infrastructure. I’m going to share some thoughts on this particularly from the perspective of housing first and in the coming posts, maybe some other aspects.

Housing has traditionally been about proximity to work and also key amenities and that was what created waves of urbanisation right from the start of industrialisation. However, over time, as the industrial core and city centres became a little degraded, the patterns of housing moved out to the city fringes and even to the suburbs, giving rise to suburban malls but also transport lines, roads that connects the city to the suburbs.

In the case of Singapore, we’ve been successful in creating satellite towns to support housing needs as our urban core area becomes too unaffordable for ordinary people to live in, and the continuous refreshing of old spaces means it has become increasingly high-rise and land-use intensified. This intensification is made possible only through advancements in public transport and the ability to pull people from more satellite towns into this urban core where people work and also do some of their consumption.

With the pandemic and work from home, demand for housing that are sitting on transport nodes linking to city centres may fall a little; the desire for more space, and comfort might become more important. Cramming people into small shoebox apartments and encouraging them to be out of their houses (a la Hong Kong) might be increasingly difficult. I am looking forward to shifts in valuation of property though that change might take much longer to reflect in the property market.

Disruptions and pain

What is a transition? It is shifting from one state to another and it entails change. So configurations and structures will have to change in order for that shift of state to occur – or those reconfigurations and structural-shifts are simply the transition itself. Over the past decades, there are some transitions that we kind of take for granted are necessary and we just allow them to happen even though they wreck a lot of havoc but most people may think nothing much of them. Then there are the transitions we haven’t fully agreed with in part because we think there are ways to stay in the same state, or that we are simply so vested in the current state that the new state feels ‘inhabitable’ to us.

Now I invite all of us to rethink those instances where we are resisting change because of that. Because of the thought that the new state is ‘inhabitable’ or is it?

Now the Energy Transition is going to be a major such shift in the world over the next decade or so. And the pace will accelerate – well, it must – in order to achieve the carbon-reduction targets that we have committed to at the Paris Climate Agreement. The world will have to radically change the way we produce food, consume products, move people and goods around. That will entail pain because activities which are geographically-bound previously may open up to more competition, communities and local economies created by the old ways of doing things may be destroyed.

We are going to find ourselves aligning with the resistance on some fronts at least; because we might think the new world on the other side of the energy transition is inhospitable for our habits, our lifestyles, at least for quite some time. But we have to think, whether our prevailing system, habits and practises themselves can eventually make earth, our one and only home planet, more inhabitable instead of the alternative on the ill-fated trajectory we are on.

Cut Plastic Bags

CNA had a great commentary piece about the tension between plastic use and modern life in Singapore. And yes, I agree with the conclusion that getting plastics out of most of our daily life is going to be pretty transformative. But honestly, we’ve done that before.

The reasons why older HDB flats have chutes in the individual flats is because in the kampong (ie. village) days, people used to just toss their waste out of their windows on to the streets or outside their houses. And if they had done that in high-rise public housing, that would have been unthinkable. So our flats built even as recent as 30 years ago still have chutes right beside the kitchen window for convenient waste disposal.

Then, when people expressed hygiene concerns about having a chute within the house, it made sense to have just one on each level for all the apartments to dispose their waste. All of these are issues of availability, not price signals. Someone somehow, using appropriate design-thinking measures, made the change and people have to adapt. This is what regulation is really about – they are issues of design rather than economics; because incentives are there to create outcomes we want and hope for. Yes, I’m trained as an economist, but no, discovering the marginal cost equal marginal benefit point is not really the goal of a society in long run.

And that’s why I advocate just dealing with the issue of availability of plastic bags – ban them progressively for different purposes, starting with some of the easier places like fashion shops (most of whom already use paper bags), then gadget shops, IT stores, followed by provision shops, convenience stores, then supermarket checkouts (not in terms of food packaging) and so on. Allow food to continue to be served in plastic bags for hygiene purposes but encourage bio-degradable substitutes. We can do this over a period of time – say, 1 year. And that’s good enough; prolonging it just makes it harder, and more painful. People are smart enough to find substitutes, and figure out other solutions. It’s not like they are not available – they just need some shoving to be adopted.

Value for Money

What do you mean when the product you got is value-for-money? How does that compare to the idea that a product is cheap? Cheap is a comment about the price you pay, nothing necessarily to do with the value you get for your what you pay. Value-for-money is probably what we are thinking of when we hope to get a ‘cheap product’ – because it implies that for the value you’re getting, the price is great! The value is a lot more.

Now in Public-Private Partnership (PPP) projects in infrastructure, there is the idea of a Value-for-Money (VfM) analysis. The idea is really to compare the PPP mode of procurement against that of traditional public sector procurement. In other words, it is taken that the government will need or want to implement the project, just a matter of how the project would be implemented. And in that spirit, PPP is not so much an enabler of projects than just a mere enhancement option that may make the project more efficient/effective, having already established the need for it.

I think too often, we get a little confused about VfM assessments and use it to evaluate if a project should go ahead or not. The Cost-Benefit Analysis that is used to establish the case for the project should be done even before the VfM – and at times, the VfM might be able to take advantage of that work to ensure that the private financing can result in a more efficient outcome. It is important that we see PPP as a mere enhancement rather than a panacea.

A lot of narratives about using private financing to alleviate state budget strains have been overly generalised and becomes simply untrue – because the state might be able to obtain financing at a lower cost and then deploy those funds into projects. So the private sector participation must contribute a lot more than that – and be able to articulate to the governments and help them echo those deeper advantages to the people. And for public sector contracting agencies, there are going to be private sector players coming along to promise lower cost of capital – but someone has to pay for it and you will have to consider whether you’re comparing quality like-for-like and if the output really is going to be as desired. The challenge of outsourcing is that responsibility to deliver projects is still that of the governments’.

For those looking into a career in infrastructure, or seeking coaching for career pivots into infrastructure, please do sign up for my mailing list, and also check out my coaching services.

Long Term Investments

Part of why it matters for governments to invest heavily into infrastructure is not just about the public good nature of it allowing those investment to uplift the poor, or to increase the economies’ capacity. Infrastructure is long term, sized for the future demand, and takes time and effort to put together. These long term investments reflects a government and a community’s confidence in the future, as well as commitment to work towards that future together.

Infrastructure involves massive coordination and while the market is a greater coordinator, the market failure in the inability to provide the public good means that government will always have to somehow lend a hand into the project. They would not be able to take off by themselves even if there might be some kind of business case involved because the government may have to enforce some kind of monopoly and provide regulatory safeguards to prevent fly-by-night operations taking demand away from the main project. For example, investment into a new water supply network where the operator earns water tariffs from supplying the local populace may require the government to temporarily regulate the bottled water industry locally to facilitate adoption and make the supply network commercially viable.

Certain seemingly draconian actions might be necessary to make the infrastructure to be invested in some local monopoly, thereby enhancing its commercial case to attract the much needed financing. We previously thought about digital monopolies somehow taking and of course making money out of it by supplying digital products and solutions. Here’s another industry where you have to create a monopoly at some level to make it work out.

Infrastructure-led Recovery

So 2020 was truly challenging for many economies. First we had a global pandemic which by itself, was really a healthcare crisis. It threatens to overwhelm the healthcare infrastructure of many countries including the most developed countries. The response of the government to proceed to lockdown mode, which created a bit of an economic crisis as the force shut-downs dampened demand severely, threatening a whole lot of jobs. So they then have to mount a secondary response to the impact of the primary response of lockdowns.

And that was unemployment benefits or at least wage subsidies to large employers to keep jobs and hence businesses breathing. The stimulus became the ventilator for the economy as Covid-19 continued to spread and impacted global supply chains, air travel, jeopardising much-needed tourism industry in many countries.

Being able to put together a giant budget to pump-prime the economy is an opportunity for putting down investments which would have much longer term positive impacts on the economy. For most developing economies which lack infrastructure, there’s a encouragement from the Multi-lateral Development Banks to explore an ‘infrastructure-led recovery’; especially to take advantage of the low-interest rate environments to take on more debt from the international markets.

Most of these points are probably theoretically true but in reality, to invest into large scale infrastructure takes time, political will, and support from population who will not see the benefits of the infrastructure until much later. The immediate job creation angle will be important and there has to be trust that the budget is not being overly strained. The ability to first obtain that supply of capital at low price, while sizing up demand for the infrastructure at a time of lockdowns, uncertain future is extremely challenging. When we lack the alignment of these key ingredients, projects don’t take off. Even when great ideas are there, the financing appears to be available and there is a compelling vision for the infrastructure. And I wonder if this is the reason for how the KL-SG HSR project came to end in a whimper.

Instead of thinking of infrastructure as a ‘means’ of recovery, we should abandon the whole notion of recovery. People die from covid, businesses shut down from the lockdowns. Economies reconfigure. And there really isn’t ‘recovery’ per se. We ought to confess that the original system of the economy that relies on sectors like tourism, aviation, or other face-to-face services have their inherent weaknesses; hence there’s a need for us to keep building up our resilience.

And often, resilience comes from creating slack in the economy, from increasing supply capacity, and making room to grow newer industries. Infrastructure is a good way to do that; especially infrastructure that allows more business activities. In a safe-distanced world, we may move away from trying to exploit agglomeration economies, so building strong connections and logistic networks will be important. The story for the infrastructure needs to be well-thought out and aligns to a greater vision of the district, region, country. Infrastructure need not be part of a recovery or growth. Singapore successfully made infrastructure development part of our story, part of our culture. We’ve build a story around infrastructure as part of livelihood that contributes to the community if the community is willing to contribute for it. Planting that in the consciousness of people is important.

Capital Markets for Infrastructure

For good or for worst, I’m returning to another topic in finance though with the slant of focusing on infrastructure. I think this stems from the fact that Singapore is in fact a financial hub and this is an area that our players are strong in, and where they participate most in the infrastructure sector. On the other hand, infrastructure projects do require huge amount of capital in order to be implemented and hence finance is particularly important as a gate through which infrastructure projects must sail through.

If we talk about the evolution of infrastructure financing, I would say that capital markets, and asset securitisation is probably serving as the tail end of the string by which financing evolves. The most basic would be government financing, where the government takes it upon their budget, either directly or through government debt, take on the project. The next stage is for a private company, using its balance sheet but also the merit of the government long-term contract, to obtain financing from the banks (with corporate guarantee and hence recourse) to develop the infrastructure. Project finance comes after that, where the merits of the project alone together with the credentials of its stakeholders allows the project to be financed by a syndicate of banks. Capital markets would then take this further by taking over the financing from the syndicate of banks either when the project is completed or when the project has gone through due diligence processes.

Capital markets is essentially the market for capital – they exists in physical form commonly in stock exchanges where the prices of various capital instruments are listed, priced and traded. Project debt or equity can also be put up on the capital markets. The slight difference of course is that unlike companies which can be assumed to exist in perpetuity, projects tend to have a finite lifecycle so there might be a predictable route its value will take given the profile of its cashflow projections. Of course, surprise situations and external circumstances will still affect its value but in some sense, projects tend to be more stable, and hence amenable to issuance of debt instruments in the capital markets. Mostly in the form of project bonds.

Bonds are debt instruments, basically it promises a stream of payments that flows into the future. These payments are fixed and can involve a huge lump sum at a certain point in time or a multiple payments on a set schedule. They are issued by corporations, governments, and of course, projects. As I mentioned in the project finance article, a lot of upstream work involves the bank finding comfort and security in the asset itself. At the point when the project has been constructed and operating, with cashflow coming from the government, some of the major risks which exists at project conception have been removed, which means that now, the project might want to reconsider if the 10% rate of interest (it can be any figure, frankly, depending on the bank and the project) the project might be better off issuing a bond at 8% (assuming the market is able to take it) and use its proceeds to repay the project finance loan. That is essentially a refinancing activity, substituting one loan with another which is at a lower cost. The difference in returns goes to the equity owners of the project.

Accessing the capital markets is considered a ‘holy grail’ for most of infrastructure; not just because it gets the banks off the backs of project owners but because the risks becomes even more distributed and hence priced lower than if the risks was concentrated and sold. Of course, the capital markets can tolerate only the higher quality projects which are well-structured and with well-specified contracts where almost every contingency is spelt out so as to give the markets clarity and comfort. With the heightened interest by large institutional investor in green and sustainable investing, there had been rise in mention of ‘green bonds’ and debt instruments to support green (& blue) infrastructure such as renewable energy projects as well as water and sanitation projects. Whether these moves from conversations to widespread reality will still take much work.

For now, most of the projects that actually have successful accessed the capital markets are in Europe because of well-established standards both for debt instruments and also for infrastructure assets. Asia was on a growing trajectory of projects being refinanced using capital markets with these transactions ballooning from 1 in 2017 (the landmark Paiton Energy Bond issuance) to 2-digit number of transactions in 2019. Covid-19 probably made a huge dent on the trajectory, but this is most certainly a space worth watching.

This article is part of a series I’m working on to make topics in infrastructure a little more accessible to students and people from outside the industry who might want to get involved.

Careers in Infrastructure

Taking a bit of a break from the more heavy-going infrastructure topics and looking at another, perhaps more personally-important topic – careers! In this short article, I thought to just share generally what sort of work and roles are there in this sector, from what I’ve observed in my few years being involved in it. I think infrastructure can be thought of as an extremely interesting sector to build a career. And it also helps to break out of the traditional mould of thinking of a career within a single profession, or in a linear fashion. In the brave new world where linear progression is no longer the norm, infrastructure presents a new way of thinking about, and approaching future careers.

As I’ve mentioned previously, there are various different streams of work for any given infrastructure project; and the professions with expertise they require would include engineers, financiers/bankers, accountants, lawyers, business development managers, project managers, economic consultants, planners, technical designers, insurers. Of course, the different parties have varying degrees of involvement and at different times, but with this spread of requirements and different perspectives, there is opportunities for anyone to move around from specialist roles into more general roles, and also for generalist to look towards acquiring credentials and become specialists as well. In fact, I’m beginning to see a lot of specialists in the area of infrastructure making a career out of it by moving to more general management or investment roles. For example, a project finance banker can move into the developer firms to help with project development, build the case for investment internally and drive the project forward. An infrastructure lawyer can do the same, bringing his specialisation into the contracts negotiation and even the structuring of legal risks to protect the developer.

Engineers, on the other hand who might have experience operating infrastructure or even knowledge in the construction and technical solutions can hop over to the commercial team to assess the commercial viability, leveraging on their understanding of the technical requirements and solutions for the piece of infrastructure. Even as a bid engineer, one can grow to be a general manager overseeing the business development team. On the other hand, a general business development staff can build up their spreadsheet and modeling skills, and become a specialist in raising capital or financing for the projects they are working on. In that sense, building a career in infrastructure can be more than just about climbing the corporate ladder and moving to a higher place but getting more exposure on different sides of the deal and being better able to get it to close because your understand helps to de-bottleneck underlying issues.

Having given a fair number of examples on the mobility of the various different kinds of roles within the sector, I thought to lay out also the subject and topic areas that infrastructure calls for. That is perhaps the area which I found the most fascinating having been involved in the work myself close to 6 years now. Infrastructure is multi-disciplinary, and range from national level concerns to hyper-local issues. I’ve already mentioned the various areas of expertise required ranging from financial, legal, technical, economic, business-commercial, even strong understanding of environment and wildlife issues. Of course, these topic areas don’t have to be mastered by any single person and are generally parcelled out broadly to domain experts who have their distinct roles in the project. For example, the consultant group behind the environmental-social impact assessment reports may consists of anthropologists, biologists, scientists, putting together the report to be read by the financiers, insurers and other stakeholders. On the other hand, the banks will of course have the accountants, the financial modellers as well as the due diligence teams.

To a large extent, when you’re working within infrastructure, there is opportunity to hop around across the various relevant disciplines. And even more importantly, having both a private as well as public perspective in infrastructure is actually really useful because it ultimately takes both sides to work together to deliver on projects. To that extent, there should be no qualms about moving across both sides and gaining the experience to cover greater grounds. Of course, there’s added opportunities in the global organisations like the World Bank Group, Asian Development Bank and Asian Infrastructure Investment Bank.

This article is part of a series I’m working on to make topics in infrastructure a little more accessible to students and people from outside the industry who might want to get involved.

Is that Asset Recycling?

Well, maybe this is not so much about infrastructure than ‘finance for infrastructure’. But given how much infrastructure generally costs, it is not quite possible to ever run away from the issue of financing. I mentioned before about the Equator Principles in article on feasibility studies and it just goes to show how much financing affects the selection of projects and the manner by which projects are developed. You realised in my previous few pieces, I was always dwelling in one way or another about finance; and the trend continues here.

Drawing private sector involvement into new, unproven greenfield (not-yet-built projects) can be challenging because they have not seen operating revenues coming online, and they don’t know how established the demand may be for the projects. Even the most sophisticated feasibility studies and advanced projections can have significant room for errors and the degree or extent of these errors often depends on the level of optimism the developers have for the projects. Yet the government will always need to build new infrastructure or expand capacities. To avoid ever-increasing debt load on the government, one way to involve private sector capital to inject financing into infrastructure is to get them involved in the existing portfolio of assets.

The government often already hold a portfolio of infrastructure ranging from utilities, toll roads and bridges, to ports and airports. These infrastructure can be cashflow generating and already have proven demands. If these existing pools of cashflow can exchanged for a lump-sum of capital, then the government have access to new pool of funds to develop new infrastructure. In an ideal world where there is no issue of government corruption and projects are executed properly with governments assessing the risks involved carefully, as well as to perform the proper economic cost-benefit analysis, this process can be repeated. While this may have been called ‘privatisation’ from the Thatcher era, the ‘new-ish’ idea here, which involves more than just straight-out sale of the asset, is called ‘Asset Recycling’.

Asset Recycling essentially depends on existing, brownfield assets that are already on the books of the government, where they are carrying debt on the asset, as well as equity share in them. They could also have large amount of people on their payroll trained to operate the asset. The possible ways in which asset recycling is done determines how much the government ‘gets out’ of the picture as capital from private sector is unlocked upfront. There’s (1) straight out sale of equity; (2) issuance of project bonds; (3) asset securitisation. Of course there are also customised approach that governments can take on under brownfield ‘Public-Private Partnership (PPP) Schemes’ but we will not dwell on that today.

Sale of Equity (aka divestment or privatisation)

By having the private sector take over the asset (often by just hiring the same group of people over) and exchanging the longer term cashflow for an immediate lump-sum of money, the government is essentially making the private sector be the ones borrowing the money against a long-term, safer stream of cashflow. Since the cashflow is somewhat proven, if it was an infrastructure where the user-pays, there might no longer be a need for government to guarantee the revenues and that means that the responsibility of the government in keeping the project viable is only to the extent they deem it strategic. No hard commitments anymore. There is also arguments that the private sector might be able to operate the asset more efficiently than the government – something I’m neutral about. I think that the profit motive is no more powerful than the desire to serve the customer well in getting a job done efficiently.

Privatisation has its share of critics and at the end of the day for each of those options, there must be safeguards that they are performed properly, priced carefully so that the taxpayers are not shortchanged in the deal.

Issuance of Project Bonds

Project bonds, which perhaps deserves an article in its own right is basically the bond version of project finance. I mentioned in that previous article a point about banks grouping together to lend to the single project. Imagine now then that instead of having banks group together, we have investors, either public or private (retail investors, or institutional ones) coming together to lend to that single project. And with these debt instruments traded, it provides liquidity for the debt-holders to more easily sell their debt down to another party should they decide they suddenly need a lump-sum of cash rather than a stream of steady cashflows.

This allows the risks to be more diffused in the market rather than concentrated in the hands of a few banks or institutions and is touted to make the system safer, especially as the world steps up capital regulation and requires banks to hold more ‘safe’ capital. In Asia, infrastructure debt are still generally classed as risk capital which banks have significant caps on in their books. There’s insufficient data indicating to banking regulators that Asian infrastructure is ‘reliable’ or stable enough in performance in order to allow them to be classed as lower risk capital.

Again, with the project already having proven cashflow the bonds can be designed for maximum ease of serviceability by the project and that will ensure a good performance. Further reading of this Deloitte article might be helpful.

Asset Securitisation

This is probably the most novel and somewhat complex way of asset recycling. In fact, some legal jurisdiction makes no room for asset securitisation or do not have sufficiently nuanced regulation and laws to enable this. Simply put here, asset securitisation takes selected or all of the revenue streams attributed to an asset and transfers it into a separate vehicle which is owned by a separate group of owners. Mizuho Bank has a really simple diagram to illustrate this and I’m just going to use it here shamelessly and have the diagram link back to its page.

Diagram Credit: Mizuho Bank

The asset itself continues to be owned by the government and management control remains in the hands of the government. Contracts are signed between the revenue-collecting vehicle to somehow restrict the actions of the project owners so as not to jeopardise the cashflow. But that effectively allows you to ‘sell the cashflow but not the asset’.

This article is part of a series I’m working on to make topics in infrastructure a little more accessible to students and people from outside the industry who might want to get involved.