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Singapore – Environmental infrastructure: Water And Waste Projects In The City State.

5 August, 2014

 

 

Introduction – The Garden City

 

Public utilities in Singapore have undergone a transformation in the last decade. Whilst most of the attention has been focused 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. 

 

Water Market Activity And Developments


Market Developments


Having just celebrated its sixth 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 SGD 1.7bn. 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 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.


More DBFO 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 self sustainability.


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 announcement of the winning bidder for the Changi NEWater Plant II is imminent. As expected the project (located within the confines of the site for the Changi Water Reclamation Plant) was tendered out on a DBFO basis in the fourth quarter of 2013 and is expected to have a capacity of 50MIGD. Breaking with convention, it is rumoured that the PUB will, for the first time, be appointing an overseas led consortium (Beijing Water) as the winning bidder for this project.


The PUB is expected to continue with the rapid expansion of both NEWater and desalination capacity in Singapore with further similar projects in the coming years that aim to double both NEWater and desalination capacity.


Deep Tunnel Sewerage System Expansion


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 June 2014, the PUB appointed a consortium of Black & Veatch and AECOM as lead consultant 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 SGD 4bn, it is understood that PUB is exploring options for the procurement of DTSS 2. It seems increasingly unlikely that the entire DTSS 2 (including the civil tunnelling works) will be subject to a DBFO structure although, it would appear, at the very least, that the proposed Tuas Water Reclamation Plant (“Tuas WRP”) 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 for at least part of the project)). The full feasibility study will start this year with full project transaction advisory to take place over the course of 2015 and with the part of the project possibly coming to market in late 2015-2016.


The DTSS is the backbone of Singapore’s NEWater production as it short-circuits the natural water cycle to produce high-grade reclaimed water on an unprecedented scale. Together with the Changi and Kranji Water Reclamation Plants, DTSS 2 and the Tuas WRP will contribute towards the long term goal of increasing NEWater supply to 55% of Singapore’s total water demand.


Jurong Island Water Solutions


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 / Public Private Partnerships (“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.


With the population and economy growing, Singapore is expected to produce 12.3m tons of rubbish in 2030, up 57 per cent from 2013. A plan and vision of a sustainable waste management system to cope with Singapore’s unique constraints and challenges is at the forefront of Singapore’s objectives.


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

 

Plant Incineration capacity Year commissioned Expected lifespan until Ownership status
Tuas IP 1,700 1986 2018 MEWR / NEA
Tuas South IP 3,000 2000 2030 MEWR / NEA
Keppel Seghers Tuas WTE Plant 800 2009 2034 Keppel / 25 year ISA from 2009
Senoko IP 2,100 1992 2018 Keppel / 15 year ISA from 2009

 

Waste Incineration Market


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 waste-to-energy (“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 third quarter of 2014 is likely to see the National Environment Agency (“NEA”) issue a tender for a new WTE plant on a DBFO bases to replace the soon to be retired Tuas plant. A pre-qualification process for the project has recently concluded. The expected DBFO tender is likely to feature a WTE plant with an incineration capacity of 2,400 tons a day which, with ancillary facilities worked in would likely have a capex of in excess of SGD 750m. This is likely to put the project out of range of on- balance sheet financing options favoured by Singapore based bidders (on smaller PUB DBFO projects) and into the realm of conventional project financing solutions. 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.


Targeting Waste Sector Productivity


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 2014 (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 was the District Pneumatic Refuse Collection System for Marina Bay. The project (which went through procurement but was ultimately cancelled) is structured on a DBOM (design-build-operate- maintain) model with the private sector taking on both construction and long-term operations risk but without the need to procure financing. Although the project did not ultimately proceed, it demonstrates a willingness on the part of the NEA in seeking innovative procurement models for achieving its productivity aims with private sector participation.


The NEA has also recently launched a study aimed at developing a technology road map that can help it deal with Singapore’s waste through 2050. The study will include a review of how the country collects, sorts, separates, recycles and treats its waste. The NEA is looking to assess state-of-the-art technologies, including auto-sorting machines that can dramatically boost manpower productivity and also to seek recommendations aimed at improving waste sorting at source. It is possible that investments in such advanced sorting facilities may be driven by the NEA through a private sector participation model.


Integrated Waste Management Facility


Bringing together both the PUB’s and NEA’s strategic plans for Singapore is the co-location of NEA’s Integrated Waste Management Facility (“IWMF”) with the Tuas WRP. This co-location marks Singapore’s first initiative to integrate used water and solid waste treatment processes to maximise both energy and resource recovery, while minimising land footprint.
The IWMF will help meet Singapore’s long-term demand for solid waste treatment. It will provide several key solid waste treatment processes in an integrated facility to effectively handle multiple waste streams such as municipal solid waste, recyclables collected under the National Recycling Programme, source-segregated food waste and treated sewage sludge. The integration of multiple treatment processes help to optimise both energy and resource recovery.


With cost-effectiveness and environmental sustainability in mind, the co-location will potentially allow the IWMF to supply electricity to the Tuas WRP, while the Tuas WRP will supply treated used water to IWMF for cooling and washing purposes. The IWMF, which will be constructed over two phases, is potentially able to cater for up to 50% of the waste treatment capacity needed in Singapore when it is completed in 2024.


The same consultants leading the study for DTSS 2 have also been given the task of looking into the feasibility and procurement options of the IWMF. With both the PUB and NEA sharing the same parent ministry (the Ministry of Environment and Water Resources), it would seem more than likely that DBFO options would also be sought for key aspects of the IWMF.

 

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 vertically integrated 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 self sufficiency. 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.

 

 

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 fresh water reservoirs compared to only three in 1965. Singapore has two separate systems to collect rainwater and used water. 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 in excess of 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.

 

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 city state.


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.

 

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 / 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 2014.


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-or-pay / 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.

 

Click to enlarge:

 

singenvirochart1 

 

singenvirochart2

 

Hogan Lovells

 

For further information, please contact:

 

Alex Wong, Partner, Hogan Lovells
alex.wong@hllnl.com


James Harris, Partner, Hogan Lovells
james.harris@hllnl.com


Julien Reidy, Hogan Lovells
julien.reidy@hllnl.com


Ming Hui Chock, Hogan Lovells
minghui.chock@hllnl.com

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