Introduction – The garden city

Public utilities in Singapore have undergone a transformation in the last decade. Whilst most of the attention has been focussed on privatisation in the energy markets, the water and waste industries have also made significant progress in reaching out to the private sector for progress. This note serves as an update on some of the recent developments in the environmental infrastructure market in Singapore as key new projects are set to attract private sector participation. Hogan Lovells Lee & Lee prides itself on being a market leader in advising on environmental infrastructure projects in Singapore. A sampling of our experience is set out in Schedule 3.

Water market activity and developments

Market developments

Having just celebrated its fifth anniversary, the Singapore International Water Week is a mainstay in the calendar of the international water industry and a symbol of Singapore’s emergence as a key player in global efforts to combat water scarcity and mismanagement. Within the next few years, the contribution of the water sector to Singapore’s gross domestic product is expected to be no less than S$1.7 billion. This is a far cry from almost a year of water-rationing imposed in Singapore almost exactly 50 years ago in 1963 – an eventuality that is almost impossible to fathom in modern Singapore as a direct result of more than a decade of persistent efforts at achieving total water self-sufficiency. With some exciting new projects on the horizon, the continuation of Singapore’s water success story will depend on its ability to stay at the cutting edge of water sector management and being able to attract innovation and ideas (technologically and commercially) from the best global minds and players.

This note and the attached Schedule 1 will describe the background to and progress of Singapore’s water resource management strategy and implementation as well as the possible private sector investment opportunities arising out of that progress.

Market investment opportunities

The coming years are likely to see the Public Utilities Board (“PUB”) seeking to break out of its comfort zone in the way it procures private sector participation in water infrastructure in Singapore. Given that the cost of assets carried by the PUB on its books need to have a corresponding impact on the water tariff charged, the PUB has sought and is still seeking innovative procurement structures to ensure that it can retain the water tariff at a reasonable level whilst moving forward with its extensive capital works programme aimed at ensuring Singapore’s absolute water selfsustainability.

Design, build, finance and operate (“DBFO”) desalination and NEWater projects have formed the backbone of the PUB’s existing procurement strategy for private sector participation in new capital works projects and further similar projects are expected in the future. The most immediate candidate is Changi NEWater Plant II. This is expected to be tendered out (again on a DBFO basis) in the fourth quarter of 2013. Similar to its predecessor (Changi NEWater Plant I), the second Changi NEWater facility will also have a capacity of 50MIGD and will likewise be located within the confines of the site for the Changi Water Reclamation Plant.

The Changi Water Reclamation Plant is the Eastern terminus of the Deep Tunnel Sewerage System (“DTSS”). Conceived in the 1990s, the DTSS was seen as a long-term solution for Singapore’s used water collection, treatment, reclamation and disposal needs. As its name suggests, it uses a deep tunnel sewer to convey (purely by gravity) used water to water reclamation plants located near the coasts (the Northern terminus of the DTSS being at Kranji).

In March 2013, the PUB issued a tender to consultants to study the next phase of the DTSS (“DTSS 2”). DTSS 2 is intended to extend DTSS coverage to the Western part of Singapore and will include a new water reclamation plant and NEWater facilities to be developed in Tuas. With an estimated capex of in excess of S$4 billion, it is understood that PUB is exploring the option of using the DBFO model as the means of procurement for the entire DTSS 2 (including the civil tunnelling works). Even if that is considered not to be feasible, it would appear, at the very least, that the proposed Tuas Water Reclamation Plant and accompanying NEWater facility would use the DBFO model in line with PUB’s existing procurement strategies. DTSS 2 is slated to become operational by no earlier than 2022 which, given the complexity and construction timeline of the project would likely require detailed study (e.g. in terms of transaction advisory / consultancy work (assuming a DBFO type model is used)). The feasibility study is expected to start this year with full project transaction advisory to take place over the course of 2014 and with the project coming to market in 2015-2016.

Click here to view image.

This review of the DTSS would be incomplete without mention of the fate of the Kranji Water Reclamation Plant. As part of its wider goal of monetising its infrastructure assets, there is a possibility that the Kranji plant could be the first brownfield sale of an existing PUB asset. There is precedent in the market following the sale in 2009 of the Senoko waste-toenergy (“WTE”) Plant (following a competitive tender process) to a subsidiary of Keppel Corporation.

Almost adjacent to the Western terminus of the DTSS would be the new energy and chemicals industrial cluster of what has become known as Jurong Island version 2.0 (“Jlv2.0”). Jurong Island has long been the heartbeat of Singapore’s chemicals and refining focus but with space fast running out on the original island, new areas of reclaimed land are being made available to a land and water hungry industry. Whilst the development of utilities (including water) support on the original island was sometimes considered to be piecemeal, the PUB is taking no chances with JIv2.0. It has commissioned a study that will look into various likely water uses on JIv2.0 (including potable water, NEWater, industrial water and cooling water) to determine how best to structure the water supply, treatment, use and recycling system on JIv2.0 so as to maximise efficiencies and minimise waste. Part of the study will look into the various business and investment models that will be best able to deliver the proposed structure at the most effective cost and these will include a focus on private sector participation options whether in the form of full privatisation, concessions / PPPs, joint ventures or hybrid models. The study will likely be completed over the course of 2014.

Waste market activity and developments

Market developments

With the fourth highest population density in the world, Singapore is a highly urbanised and industrialised city-state. This urbanisation amplifies the environmental, pollution and waste impact that each of the close to 7,000 people per square kilometre has on the island. Throughout its development, Singapore has been highly conscious of the environmental pitfalls of industrialisation and urbanisation. This has meant that investments in waste collection and treatment infrastructure have always been made in tandem with industrial and urban developments. Whilst Singapore has been well served with existing waste management policies, it also recognises that the social challenges of development require a leap in its approach to waste management. The Singapore waste management market is at a crossroads in its development as it looks to push forward with greater productivity and innovation in the collection and treatment of waste.

This note and the attached Schedule 2 will describe the background to and progress of private sector participation in Singapore’s waste management market.

Market investment opportunities

There are two key drivers behind Singapore’s push for greater private sector participation in the waste market. The first is as part of a wider strategy by the Singapore government to monetise infrastructure assets in the city state. Both the power generation and water industries have been beneficiaries of this policy and the waste incineration market has also had its fair share of success with a greenfield DBFO WTE project (the Keppel Seghers Tuas WTE Plant) reaching financial close in 2005 and commencing operations in 2009 and the divestment of the Senoko WTE Plant (also to a Keppel subsidiary) in 2009.

With the Tuas incineration plant (“IP”) close to reaching the end of its 30 year service life, the fourth quarter of 2013 is likely to see the National Environment Agency (“NEA”) issue a tender for a new WTE plant to replace the soon to be retired Tuas plant. Although the NEA and its parent Ministry (the Ministry of Environment and Water Resources (“MEWR”)) has an established history in successfully operating waste incinerators, the Singapore government’s wider policy objectives are likely to trump any desire within NEA to traditionally procure what will become Singapore’s newest WTE plant. The expected DBFO tender is likely to feature a WTE plant of no less than equal size to the existing Tuas plant (i.e. with an incineration capacity of 1,700 tons a day). It was considered at one point as to whether the new plant could act as a captive power source for a desalination plant to be located at the same site but it appears that land restrictions have rendered that option unlikely.

When the Senoko WTE Plant was divested in 2009, a 15-year incineration services agreement (“ISA”) was signed to reflect the remaining shelf-life of that asset. The Tuas South waste incinerator was commissioned in 2000 and conventional wisdom would dictate that it may also soon be ripe for a similar divestment as that which affected its sister plant. With a capacity of 3,000 tons a day, the Tuas South incinerator is currently the largest waste incinerator in Singapore in terms of incineration capacity.

With pressures against rising immigration, labour force productivity has taken on a strong political following in Singapore in recent years. The waste market has consistently punched below its weight in terms of productivity both with respect to the use of labour and land. Singapore ranks well below OECD jurisdictions both in Europe (e.g. Germany) and Asia (e.g. Japan and Taiwan) when measuring productivity in the waste market. The Singapore government is unlikely to allow this to continue. The new waste incinerator to be tendered in 2013 (mentioned above) is likely to set new benchmarks with respect to productivity of land use and the Singapore government will be making a push towards more innovation and technological advancements in the waste market.

A first step towards achieving that latter objective is the District Pneumatic Refuse Collection System (“DPRCS”) for Marina Bay. The project (which is still in procurement) is structured on a DBOM (designbuild- operate-maintain) model with the private sector taking on both construction and long-term operations risk but without the need to procure financing. Legislative amendments for a licensing regime that will allow DPRCS projects to be implemented throughout the city-state are being contemplated with the aim of centralising waste collection into a number of hubs or nodes throughout the island. Should the Marina Bay project move towards a successful close, it will demonstrate a willingness of MEWR and the NEA in seeking innovative procurement models for achieving its productivity aims with private sector participation.

Click here to view table.

Schedule 1

Summary of Singapore water market evolution and typical water project contract and payment structure

PUB

The PUB underwent a revolution in the late 1990s, shedding its previous role as a single verticallyintegrated utility providing both power and water services to the Singapore public. The Singapore government’s power privatisation plans stripped the PUB of its energy responsibilities and leaving it to focus its efforts, as a water utility and regulator, to managing and providing a scarce resource to a growing population. In a little over a decade after the PUB was provided with its new responsibilities, it has flourished as a multiple award-winning example of a textbook water utility.

Within Singapore’s legal and regulatory framework, the PUB is a ʻstatutory board’, meaning that it is a creation of statute (the Public Utilities Act (Cap 261)) with its own legal identity independent of the state. It has the ability to sue and be sued in its own name. The PUB comes under the purview of the MEWR.

The “four taps”

Singapore is one of the most densely populated countries in the world and that density places enormous pressure on water resource management. However, Singapore’s water resource shortcomings (a limited catchment area with minimal groundwater availability) are finely balanced with its assets (twice the global average rainfall and being surrounded by water (albeit salt water)). Singapore’s key asset may however be the political will that has driven it towards becoming completely self-sufficient in water resources.

Arguably stemming from a dispute in the late 1990s with its neighbour Malaysia over the renewal of existing water supply agreements, the PUB was mandated by the Singapore government to undertake a strategy that would push it towards water selfsufficiency. This resulted in the four taps strategy that today forms the backbone of Singapore’s water resource management strategy. As illustrated in the diagram below, Singapore will rely on four key sources of water representing the four taps.

Click here to view diagram.

The first tap remains the import of water from Malaysia which expires in 2061 (an earlier agreement for the import of water having already expired in 2011). The Singapore government does not appear to have made a firm decision on whether it intends to let that final water import agreement expire although in a speech to Parliament in 2002, then Minister of the Environment, Lim Swee Say, stated that Singapore could be completely self-sufficient in water by 2061.

The second tap which, like the import of water, maintains a link to Singapore’s history is the management of Singapore’s limited catchment areas. With the completion of the Marina Barrage in 2008 (forming a fresh-water reservoir within the commercial and financial heart of the city), Singapore’s water catchment area amounted to two thirds of its land area. Currently, there are 17 freshwater reservoirs compared to only three in 1965. Singapore has two separate systems to collect rainwater and used water1. Rainwater is fastidiously collected through a comprehensive network of drains, canals, rivers, storm-water collection ponds and reservoirs before it is treated for drinking water supply. This makes Singapore one of the few countries in the world to harvest urban storm-water on a large-scale for its water supply.

As mentioned above, used water is channelled through the DTSS to water reclamation and NEWater plants. NEWater is a uniquely Singapore term. In summary, it is high-grade reclaimed water produced from treated used water and purified through advanced membrane technologies. The treated water is of a consistently high quality and well within the US Environmental Protection Agency and World Health Organisation’s standards for drinking water. Singapore now has five NEWater plants which can meet 30% of the nation’s water needs. By 2060, NEWater capacity is anticipated to triple so that it can meet 50% of future water demand to form what would be the largest of the four taps.

The final tap on which Singapore draws its water is desalination. Although a hugely energy intensive operation, desalination is an obvious choice for an island nation and the hope is that advances in osmosis technology will eventually drive operating costs down. Desalination currently fulfils 10% of the nation’s water needs. By 2060, desalination capacity is intended to ramp up by almost 10 times so that desalinated water will meet at least 30% of Singapore’s water demand in the long term.

Water source management must however work hand-in-hand with water conservation. A public education drive that started as far back as 1971 continues today in Singapore schools, factories and the media. This drive is reinforced with water pricing that reflects the actual value of water in Singapore and a water conservation tax that effectively penalises disproportionately large users of water. This has allowed Singapore’s domestic per capita use of water to fall from 165 litres a day in 2003 to 155 litres a day in 2010 and with a goal to further reduce this to 140 litres a day by 2030.

Water project structures

Until 2001, when the tender for Singapore’s first desalination plant was launched, public procurement in Singapore was carried out mostly in the traditional top-down fashion. The tender for Singapore’s first desalination plant broke new ground in that the PUB opted to involve the private sector to develop the project through a DBFO model. The appointment of Hyflux as the winning bidder for that tender sparked the beginning of a water industry revolution in Singapore and by the time Hyflux was again chosen as the winning bidder for Singapore’s second desalination plant in 2010, Singapore had no less than five NEWater and desalination plants operating under the DBFO model.

The evolution of these projects has led to a uniquely Singapore market standard in both the commercial and contractual structuring of these projects. The diagram and table on the following page present an indicative illustration of the contractual and payment structures in a typical DBFO Singapore water project. The projects are structured as take-or-pay / availability based arrangements removing offtake risk from the private sector. An initial key concern had been the position of PUB as the offtaker but a combination of a strong balance sheet and unwavering political support for the water sector has led to an acceptance of this position. A key test is likely to emerge in the not too distant future when, with the completion of DTSS 2 in or around 2022, the Ulu Pandan NEWater facility (owned by a subsidiary of Keppel Corporation) is likely to be phased out. The Ulu Pandan NEWater facility is being operated under a DBFO arrangement until 2027 and any early termination of that contract should trigger the termination payment provisions under the contract.

First DBFO Desalination Plant

We had advised the successful bidders for the first DBFO desalination plant in Tuas. This was Singaporeʼs first DBFO project with a structured public sector off-take. A number of the key risk issues and negotiated positions relating to a Singapore public sector contractual counterparty in a DBFO / PPP context evolved from this first Tuas desalination project.

Typical contract structure for DBFO water projects

Click here to view diagram.

Typical payment flows for water purchase payments

Click here to view table.

Schedule 2

Summary of Singapore waste market evolution and typical waste project contract and payment structure

NEA

The NEA is a relatively new organisation. Formed on 1 July 2002, the NEA is the leading public organization responsible for improving and sustaining a clean and green environment in Singapore. The then Ministry of the Environment had direct oversight over Singapore environmental management. Part of NEAʼs purview is in solid waste management where, amongst other things, the NEA plans, develops and manages refuse disposal facilities and licenses and regulates refuse collection. The NEA is also tasked with the conservation of resources which it undertakes by promoting the “3Rs” (reduce, reuse, recycle).

Like its sister organisation (the PUB), the NEA is a statutory board created under the National Environment Agency Act (Cap 195)) with its own legal identity independent of the state. It has the ability to sue and be sued in its own name. The NEA also comes under the purview of the MEWR.

The Singapore Green Plan (“SGP”)

The SGP evolved from the need for a fresh approach to environmental management towards the end of the 1980s. At that point in time, basic infrastructure for the removal and disposal of solid waste, sewage and wastewater were in place. However, an increasing population with higher expectations and growing appetites continued to exert pressure on Singapore’s limited capacity to cope with resource consumption and waste generation.

These reasons paved the way for the then Ministry of the Environment (subsequently renamed MEWR) to draw up and publish the SGP in 1992. The SGP charted the strategic directions that Singapore would be adopting to achieve its goal of sustainable development. To keep the SGP relevant amidst the changing economic and environmental landscapes, a review was initiated a decade later and the SGP 2012 was launched with the message that the new challenge Singapore faces is no longer environmental performance, but environmental sustainability.

From the perspective of solid waste management, this meant addressing a six-fold increase in the amount of solid waste disposed in Singapore between 1970 and 2000 (increasing from 1,300 tonnes a day to 7,600 tonnes per day. At this rate, Singapore would need a new incineration plant every 5-7 years and a 350-hectare landfill every 25-30 years. This is clearly unsustainable for a small citystate.

The SGP 2012’s solution to this is to pursue a strategy that aimed at raising the overall recycling rate to 60% of all waste generated, extending the lifespan of the Semakau Landfill and pursuing a “Towards Zero Landfill” strategy and thus reducing the need for new incineration plants from one every 5-7 years to one every 10-15 years.

The strategy has produced some tangible results. By 2004, the daily amount of solid waste disposed had fallen to 6,800 tonnes a day and Singapore had achieved its 60% recycled waste target in 2012 (see the tables below on key indicators of waste disposed and recycled in Singapore in 2012). The Semakau Landfill is now expected to serve Singapore’s landfill needs through 2040.

Key Singapore waste statistics 2012

Click here to view table.

% Composition of waste disposed / recycled (2012)

Click here to view table.

Waste incineration however still forms the backbone of Singapore’s solid waste disposal strategy. Given that incineration reduces waste volume by up to 90%, 91% of disposed waste in Singapore is incinerated and the ash generated is disposed at the Semakau Landfill together with the 9% of waste that cannot be incinerated. The WTE incineration plants produce 2- 3% of Singapore’s power needs and studies are also in place to consider using the ash generated in waste incineration as road construction material – an application that is already in use in jurisdictions like Germany and the Netherlands.

Waste project structures

When the Keppel Seghers WTE Plant achieved financial close in 2005, it was touted as Singapore’s first genuine DBFO / Public Private Partnership (“PPP”) project to close with international bank financing.

It removed any lingering doubt as to whether international financiers were willing to bank a project in Singapore at a sub-sovereign level (i.e. with NEA as the offtaker) without additional financial support (e.g. from central government). This project remains the only greenfield project financing in the waste sector in Singapore at least until the proposed redevelopment of the Tuas incineration plant later in 2013.

The ISA for both the Keppel Seghers project and the subsequent brownfield divestment of the Senoko waste incinerator followed similar structures and they in turn deviated little from the structures adopted by the PUB for their DBFO capital works projects. The diagram and table on the following page present an indicative illustration of the contractual and payment structures in a typical DBFO Singapore waste incineration project.

As with the PUB projects, the structures are take-orpay / availability based arrangements removing offtake risk from the private sector. Even though the NEA (as a statutory corporation) does not share the same strong balance sheet as the PUB, investors and financiers seem to have found comfort in equating NEA risk with overall Singapore country risk. Revenue from power sales into the merchant power market in Singapore are passed back through to the NEA.

Keppel Seghers WTE Plant

We had advised the lenders on the project financing of this project which achieved a few “firsts” − the first of Singapore’s incinerators to be privately owned and operated; the first project financing of a Singapore utility asset awarded under the PPP model; and involved the longest tenor (to date) for a Singapore project financing (23 years). The 23 year tenor of this loan significantly exceeded anything previously done in the Singapore market.

Typical contract structure for DBFO waste projects

Click here to view diagram.

Typical payment flows for incineration services payments

Click here to view table.