Infrastructure – Kevin Low

Chicken and egg problems

I first heard about this as a question around which came first and the challenge of studying causality in somewhat circular systems. But then it was also characterised as a problem when we want to develop a new system to displace the prevailing one. It is some kind of situation where you need something to start another and you need the other to get the something you need.

Classically, if you want a thriving business, you need customer, stakeholder support but in order to do that, you need to have the business first. Or that you need capital to build a business but then quite likely the route to getting money for capital is to have a business. When success builds upon success, based on what you can observe, then you have a chicken-and-egg problem on hand when you want to create the success to begin.

Essentially anything that involves some kind of circularity exhibits this kind of problem when it needs to be first put in place. Several strategies have been looked into for this problem. There’s bootstrapping – which generally entails squeezing out some resources from existing pockets/spaces to be able to get the first bit of results which will drive more. And then let it snowball.

There’s the ‘fake-it-till-you-make-it‘ approach, which involves essentially lying to at least a small group of stakeholders to get them onboard in order to bring in the others. I do not recommend this. Finally, you could also take immense amount of risks, exhausting resources, adopting the ‘build-it-and-they-will-come’ approach.

Governments in particular do all three a lot. And it can be wise to learn from them when it comes to business. Sometimes they can be good entrepreneurs.

Moving solar around

You might have seen solar panels ground-mounting on vacant land in Singapore. Today I was on a cab when the driver told me about this and thought it is such a waste of land in Singapore.

So I explained the idea that our government agencies had and the tender they designed. The projects are actually to maximise the use of land rather than waste them. In Singapore, there are plots which are left vacant for future development – they may not be empty for the full period of a solar farm, but at any one time in the island of Singapore, there should be enough space to hold a certain amount of ground-mounted solar. So the plan is to move the panels around to a vacant lot once an existing solar farm land is needed for development.

Such a model seems common sensical but requires a great deal of coordination and detailed thinking. But in the grand scheme of trying to produce more green electricity for our island state, this is not exactly a great solution. And this is an example of the challenge that Singapore faces when it comes to being innovative and scaling solutions. We have requirement for unique solutions that serves us well but probably no one else – nor are we able to easily adapt our solutions to other places.

Not sure who else would want to be moving their solar panels around.

Blue bins

In the first episode of my recently launched podcast, I kind of ranted about the blue bins in the National Recycling Programme that Singapore has. My major gripe was that the system for blue bins which was completely open access and operated by riding on the back of the public waste collection system was designed to fail because by seeking to include everyone, it made securing a clean stream of recyclables harder.

I noted that an alternative system where people sign up to gain access to the blue bin, and pledge to abide by the ‘rules’ of using the blue bins could do better. They could pledge the following:

they will use the blue bin only for recycleables allowed,
they will ensure the items are cleaned and ready for recycling,
they will only access the blue bin themselves,
they will ensure the blue bin is locked after their use,
they will not deposit into the blue bin when it is full or when they note it is contaminated

Friends at Upcircle has shown that by giving assurance to people who care and show up for the environment that you are able to deal with the recyclables properly, you can actually obtain good quality post-consumer recyclable stream. By preventing those who doesn’t care about recycling from taking part in pseudo-recycling by their own terms, we can actually do better.

Recycling better by excluding people isn’t exactly the best narrative to the ears but in due course, that can actually change the culture.

What should capital chase?

The previous two posts are really just preparing me for this final one about returns on capital. We have talked about the aspirations of labour and that perhaps capital should be more like labour, where it is not just trying to get a return to multiply itself, but actually to look to more qualitative returns as well. But how would capital do that?

We see examples of this done using state capital. The government uses its capital to invest into public infrastructure, education or even public housing; all of these drives returns at broad economic and social levels. And this can generate more taxes in the future but the idea of the government isn’t to actually be able to generate more taxes in the future. Having more taxes is good because it can sustain the pace of these investments but the actual return is what the society reap in terms of better standards of living, greater knowledge in the people and so on.

Yet private capital holders are not exactly thinking this way. Private capital holders act as if most of what matters is that invested capital reaps more capital. And imagine if this was applied to the government, that it simply invests more so as to gain more taxes. It might end up investing in more coercive approaches to extracting more taxes. Or to just invest in areas that gives it more power.

If companies starts developing a vision of the future and of the world it wants to build, and define the returns on capital as what gains the world get in steps towards those vision, one could expect businesses to behave differently. In other words, we start investing the way we would want to be able to practice charity or giving effectively. We put our money where there can be most impact and action towards the future we want to see in the world. The returns come when we are able to step into the future that we had envision, not when the money flows back in. In most cases, if that future in our vision materialises, the monetary gains should come in to sustain that vision. If it doesn’t, then something is missing somewhere, and you either find another vision or path to invest into, or harness further resources needed to move towards that.

Feasibility of an Infrastructure

A huge part of infrastructure development work upfront is the feasibility study. What exactly goes into a full feasibility study and why is it so important? This article aims to explain that simply and more accessibly to people outside the industry. We’ll focus on the feasibility study rather than any documentation on projects generated prior to that (sometimes called pre-Feasibility Study – which could be considered a ‘lite’ version).

The feasibility study is like a professional evaluation of a business plan. For any infrastructure project, this is a comprehensive look into all the practical, legal, technical and commercial aspects of the project. Often, it will include social and environmental dimensions of the project in order to ensure that the lenders (ie. financial institutions providing debt to the project) is satisfied. In markets where there is significant social and environmental activism, the lenders are also on the receiving end of hate-mail, harassment and boycotts. Major project finance lenders internationally have therefore got together to be involved in The Equator Principles – a risk management framework that banks sign up to abide in assessing the environment, social risks involved in projects.

What then constitutes environment and social risks?

Infrastructure projects are physical, and will almost always require clearing of a piece of land to allow construction to take place. This would mean either resettling villages, people, farms, or redeveloping urban spaces, or even clearing swathe of rainforest. In cases of large hydropower dams, it will involve spaces not only for construction of the dam but also planned floodplains which can include multiple villages, broad swathe of forests. All of these impacts on human lives, biodiversity, alters natural landscapes.

Of course, the banks, developers, and builders care about people and rainforests. But beyond that, they are concerned about being harassed, haunted by NGOs, activist organisations trying to run them down reputationally for having been involved in projects that destroyed natural habitats for endangered species, upsetting livelihoods. These forms the environment and social risks; and the feasibility study tend to cover aspects of the social and environmental impact assessment, as well as to propose means to mitigate. Through that, the developers of the project also forms an idea how much resources they might need to expend to support resettlement, to help rebuild livelihoods destroyed.

How about practical and technical risks?

The feasibility study also goes into the technical and practical aspects of the project, including studying the possible technologies to deploy, the actual site conditions: whether the land can accommodate the infrastructure, whether there is actually sufficient demand for that infrastructure, and if the infrastructure has everything needed to service that demand – this could take the form of water supply pipe network, or an inter-connector to the national grid for a power plant.

The study needs to ensure that the proposed technical solution is able to deal with the problem statement at hand. For example, if we are using incineration for the waste, then we have to ensure that the waste stream is not too moist. If the waste is wet, the incineration system may not perform properly, which leads to potential technical breakdowns or stoppage.

And not forgetting the legal and commercial risks?

At the end of the day, the project will have to comply with the law of the land, and often, there will be a lot of permitting, licensing, government approvals that are needed for various components of the project. The feasibility study will investigate all of these and the developers will also do their best to make sure the requisite approvals and permits are obtain in advanced even often in parallel with the feasibility study just to make sure that the project is progressing in a timely fashion. These documentation will often be studied alongside the feasibility studies by the lenders.

Lots of parameters, and results from various aspects of the feasibility study would be captured into the financial model that is used to work out whether the project is commercially viable – that is, the total revenues/payments expected for the lifetime of the project is able to pay for its total cost over its lifetime. Governments may also undertake an economic cost-benefit analysis, to see if the total economic benefit of the infrastructure project is able to cover the total cost to society (more on this from a previous article I’ve written).

At the end of the day, flagging out, assessing and then measuring these risks enables the developers, lenders, and the government to have a better picture of how viable the project really is, hence its feasibility – from the various risks perspective as well as the resourcing that can be availed to the project. Doing proper feasibility studies can also help government better plan areas surrounding infrastructure, whether it is to mitigate some of the impacts of the infrastructure, but also to see if developments around the infrastructure can help improve its feasibility (eg. a larger substation might have to be built in the area to be able to accommodate a large utility scale solar park which would not have been able to feed power into the national grid).

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.

What is Bankability?

infrastructure

I’m hoping to embark on a series of writing that will help the university students and young graduates appreciate the infrastructure industry better. I know this is likely the beginning but I’m not sure when it will end or how frequently I’ll be writing. For now, I thought I just want to get started and eventually when there is critical mass, I’ll be putting it up on a separate website.

For consumers, when we apply for credit cards, the bank taking in the application wants to know our income, our employer, age, and will probably scrub our current track records for payment on our other cards, as well as any outstanding debt we have. For businesses, the process involved in loan applications is somewhat similar. Banks look at the years it has been established, the revenue/sales track records, the profitability of the firm and or sometimes they are financing based on the invoices – payments that the firm will be receiving from its customer for goods sold.

And then there’s infrastructure projects; they are not yet built, there’s no cashflow or payments made to the infrastructure, sometimes the land is not even acquired yet (there’s no one providing funds to acquire the land!). The willingness of a well-established financial institution to lend money to the project at reasonable interest rates (ie. ‘bankability’) will depend a lot on factors that surround the projects which gives good indication of the ability of the project to repay its debt. Like consumer credit, the more data the banks have, about both projects of the type in general, and also specific data about the project to be financed, would help give them a better sense to assess if they should lend to the project.

So what kind of data? I’ll distinguish between the availability of data, and the outcome of the assessment on the data available. The banks need data on the reliability of the sponsors/developers (essentially the equity owners of the project), the engineering-procurement-construction (EPC) firms involved, the government or customer of the project (ie. the one who will be paying for the services the infrastructure provides), as well as the underlying project involved. For each of the entities involved:

Previous payment/financial performance – in the form of financial statements, records, etc.
For government, often some kind of sovereign rating
Track records in project execution (especially in terms of the construction in the case of EPC firms, and operating experience for the developer or whoever they might be appointing to operate the project)

Then for the underlying project, the sources of data that will allow the banks to make the assessment would be:

All the contracts involved in the project
Feasibility studies involving site survey results, data – independent studies verifying that the proposal is feasible, technical solutions can deliver expected results, etc.
Any documentary evidence of support by governments or other development financial institutions towards the project.

In essence, these things are basically like the payslip or appointment letter from your employer which you submit for your credit card application. They give proof that the project is able to be put together and generate the kind of cashflow worthy of the loan that it will be taking out. There will also be sophisticated financial models that are shared across the developers and the banks in order to work out transparently what is the cashflow expected from the project across its lifetime and how these cashflows will be divided amongst the various stakeholders.

Through the information, the bank determines how stable the cashflow is, the level of comfort they have with the creditworthiness of the various parties, and then work out the pricing (ie. interest rates) on the loan, which helps to update the financial models, and provide more clarity to all the parties involved on how the returns from the project are shared. The assessment of risks by the bank (which impacts on pricing and whether they would be interested to finance the project at all) will be based upon their internal due diligence on the various parties involved in the project, as well as the feasibility study, and the set of contracts underlying the project. It often depend critically on the government involvement in the project and how they are involved. Major project finance deals are often achieved with government providing a guarantee on the income stream of the project conditional on the performance of the project based on pre-agreed indicators. Once the bank is satisfied that the operators and developer is able to perform in accordance to the contract, they shift their attention towards the creditworthiness of the government who have promised to pay.

As a result of these complexities, infrastructure transactions themselves are not only big in terms of the investment but they do require big teams to put the transactions together whether it is on the developer side, the financial institutions or the consultancy teams. These teams are all combining various disciplines including accounting, finance, engineering, general management, project management, legal, etc. To that extent, we do think that the industry is a good generator of job opportunities. The challenge is that these projects are typically have activities in starts and stops (extreme busyness in one camp or another in different points of time). The skills required across the sector is quite wide-ranging though the topic tend to be more narrow and focused.

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.