The rapid development of the financial sector, including long-term lending and project finance in Singapore, has contributed to the successful implementation of multi-million dollar projects in industry, energy, infrastructure, transport, trade, real estate, healthcare and other areas.

Singapore, a small state in Southeast Asia, has undergone major economic changes since the end of World War II.

As a result of these transformations, this former British colony is now one of the most economically developed countries in the world, significantly influencing the geopolitical situation in the region.

Today, innovative financial instruments play an important role in the development of big business and international cooperation between Singaporean companies and foreign partners.

Brief overview of economy of Singapore

Southeast Asia is the most politically, culturally and economically diverse region on the planet.

Here, the highly developed countries and the poorest countries in the world coexist side by side. Singapore is of exceptional interest among the most investment-attractive countries that have achieved a high level of development.

A small island state, devoid of valuable minerals, is surrounded by much stronger neighbors, both in territory and in economic power. It is important that the region is torn apart by political, ethnic and religious contradictions. The Lion City, as Singapore is sometimes called, has managed to create an efficient political and economic system that has allowed not only to survive on the world stage, but also to effectively use the available local resources for the prosperity of business and society.

Singapore is a city-state with an open economy based primarily on the international trade.

It is the leading financial, shipping and trade center in the Asia-Pacific region and a gateway for expanding trade and investment in the rest of Asia.

Singapore’s policy is aimed at developing friendly relations with all neighboring countries, supporting activities within the ASEAN framework, liberalizing international trade, and establishing close trade and economic ties with all interested partners.

Singapore’s Gross Domestic Product reached US$397 billion in 2021, which is impressive given its population of just 5.45 million. Economic growth at the level of 3.8-4.5% per year contributes to the further development of this promising market by foreign companies and the attraction of additional investments in all key sectors. This is also facilitated by the balanced policy of local authorities.

The Singapore government pursues a business-oriented economic policy, creating an attractive investment climate in almost all areas.

Singapore’s economy is dominated by services, the most important of which are trade, banking and financial services, and infrastructure and transportation.

Industrial production is also important, especially high-tech industries with high added value. A favorable investment climate and stability facilitate the implementation of capital-intensive projects based on project finance (PF) and other advanced financing schemes.

Singapore is considered to be a well organized country in terms of legal, tax, regulatory and political issues.

It is highly trusted by large foreign investors due to its economic and social stability, a well-developed financial sector operating in accordance with the best international standards, as well as a large number of high-qualified specialists in the local labor market.

Singapore has been pursuing a successful pro-export policy in recent decades. The electronic industry, shipbuilding, mining machinery and petrochemical industries are at a high level, attracting the attention of investors from all over the world. Singapore is also one of the world leaders in biotechnology, medicine and many other science-intensive fields.

The prosperity of Singapore is largely based on its favorable location, as the city plays the role of a world trade center.

The weaknesses of the Singaporean economy are the lack of raw materials, which makes local investment projects highly dependent on the import of minerals, raw materials, semi-finished products and energy.

But this fact did not prevent Singapore from becoming the third oil refining center in the world after Rotterdam and Houston. Agriculture plays a minor role in the local economy, so almost all necessary food is imported.

Some features of project finance and lending in Singapore

Project financing is a method of attracting long-term debt financing for large investment projects, in which the source of debt servicing is the cash flows that the project generates or will generate in the future.

This method came to Southeast Asia later than to the European market, where it showed itself in the financing of large oil and gas projects. Despite the high cost of organizing PF schemes, this method allows companies to attract huge financial resources on an off-balance sheet basis, using special formally independent companies (SPV, SPC).

Lending and project finance in Singapore is traditionally well developed and has a long history of commercial success.

This market is replete with large-scale public-private projects (PPP) designed to develop infrastructure, energy, manufacturing and trade.

This concept has been widely used by Singaporean companies for the construction of water treatment facilities, marine infrastructure, waste processing plants and other facilities. Since the mid-2000s, official guidelines have recommended increased use of project finance to modernize and expand high-value facilities worth over S$50 million (about US$35 million).

Major projects in Singapore are financed by dozens of financial institutions, among which we should mention such reputable institutions as Standard Chartered Bank, United Overseas Bank, BNP Paribas, Bank of America and a number of others.

Singapore banks play a huge role in project finance schemes throughout the region. According to some reports, more than half of all project finance loans issued to companies in Southeast Asia are issued by financial institutions in Singapore. In 2018, the Infrastructure Asia was created, which is designed to help Asian businesses in the development of large infrastructure projects.

An important feature of the implementation of investment projects in Singapore is the smaller scale and, accordingly, the lower cost of projects compared to countries such as India, China, Japan or Saudi Arabia.

This is reflected in a peculiar approach to contractual relations, financing terms and capital structure. In particular, financing without recourse to the borrower is used less frequently.

Non-recourse financing gives the lender the right to repay the debt only from the profit generated by the project. From the borrower’s point of view, the risk is limited to the funds that he has invested in the project. Thus, most of the risk lies with the providers of capital.

To finance expensive projects, partners use innovative mechanisms to ensure the safety of capital, increase the creditworthiness of companies and collateral. This includes mezzanine financing, the collateralization of a loan with highly liquid assets, the issuance of bonds, and more.

For example, a bank may issue a large long-term loan for the construction of a new facility.

Large investors provide liquidity by issuing asset-backed securities.

The borrower provides this liquidity to lending banks in exchange for long-term loans, which are converted into securities and contribute to a credit rating upgrade.

Singapore law does not restrict foreign participation in special purpose vehicles that are registered in the country. Exceptions are such sectors as banking, media, as well as some projects in licensed industries. Restrictions usually relate to the ownership of a controlling stake in a company, which is important to consider when designing a project finance structure in Singapore.

In general, the local system is quite liberal and does not require special permissions to organize project finance schemes. Additional costs associated with obtaining permits and licensing may be required only for the registration of land, the operation of communal infrastructure, as well as some issues related to energy, telecommunications, access to water and waste management.

When planning investment projects in Singapore, investor should also take into account laws that allow the authorities to forcefully buy land from private companies for public purposes.

These rules are rarely enforced and are all clearly defined in local legislation.

Project finance services in Singapore: Our core business service

Contact our consultants and learn more about CP Finance UK Finance opportunities in international project finance.

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Financing large investment projects is one of the most important aspects that determine the survival and development of any business.

Access to financial resources means freedom of choice for business entities.

Long-term financing of large investment projects are widely used for the construction and modernization of large facilities.

New transport hubs, power plants, production halls or wastewater treatment systems – investment projects have different goals.

Limited internal resources of the company are a serious obstacle to investment activities. Given the difficult access to debt capital for some companies, this issue becomes even more important.

Understanding the instruments for financing investment projects facilitates decision-making and creates opportunities for better business adaptation to the rapidly changing conditions of a highly competitive global market.

CP Finance UK offers flexible schemes and financing models for large projects for companies around the world.

We invest in energy and renewable energy, oil and gas sector, industry, agriculture, infrastructure projects, real estate and tourism. 

Financing long-term large investment projects: choosing sources

Financial resources are the main engine of business activity, regardless of the size and type of business.

The economic processes taking place in each company are determined by the available capital, the received income and expenses necessary for the successful conduct of commercial activities.

Given the tough competition for capital on the global market, the problem of attracting financing for investment projects is now coming to the fore. It is an irreplaceable resource at the stage of creating an enterprise, conducting current activities and implementing long-term investment projects.

All of the above requires the correct use of financial instruments so that the selection of sources and the formation of capital is carried out in the most rational way.

This is important when choosing sources of long-term financing that will ensure the implementation of large projects in the long term.

Funding sources are classified into two groups:

• Internal sources. Resources are formed from the financial flows of the company received as a result of ongoing economic activities, as well as from the sale of assets (equipment, real estate).

• External sources. Financial resources for the implementation of projects are provided by third parties in the form of loans, subsidies or in another form (for example, an issue of shares).

In the financial literature, the process of financing large projects is analyzed from different points of view.

Many scientific studies show that equity capital remains the most important source of funding, especially for small and medium-sized enterprises (including microenterprises).

Internal sources of funds include the surplus of funds arising as a result of current activities, as well as funds received from the sale of certain assets and the acceleration of the turnover of working capital.

Capital can also be provided to an enterprise from external sources. In the case of self-financing, the source of capital growth can be contributions from the founders. This means that in order to raise funds, the owner limits his personal needs in order to finance projects.

Financing the investment activities of companies using equity capital has both positive and negative effects on enterprises.

The disadvantage that limits the investment opportunities of companies to the greatest extent is the low level of equity capital.

Usually these funds are insufficient to meet the growing investment needs.

In the face of changing conditions, many companies sooner or later have to turn to banks, financial institutions and private investors to attract long-term investments. Business entities can use a wide range of different financial instruments depending on their needs and preferences.

Off-balance sheet and large long-term bank loans remains an important source of financing large investment projects 

Loans can be classified according to various criteria, but the division is not clear. In any case, business lending should be tailored to the needs of a particular group of clients.

It is worth noting that the availability of bank loans for companies in poor financial health is limited. This is due to the strict requirements of financial institutions in terms of capital recovery. To obtain large loans, borrowers must have assets that are attractive to lenders.

However, it should be emphasized that the strict requirements of financial institutions are far from the only obstacle to external financing. The mentality of the entrepreneurs themselves also plays an important role. Small business owners have a negative attitude towards lending, preferring to rely on themselves.

There are two main reasons for this.

First, financing long-term investments with external funds entails significant costs.

Secondly, the fear of loans stems from the psychology of the entrepreneur, for whom legal and economic sovereignty is extremely important.

A consequence of the high requirements for securing bank loans is the growing demand for non-bank instruments for financing investment activities. The growing interest in long-term investments is accompanied by the activation of alternative instruments and the rapid development of non-bank financial institutions around the world.

The decision on the choice between financing projects with equity capital or borrowed funds plays a decisive role in the development of any business. The choice of a particular source depends on factors such as the availability of financial resources, costs, flexibility of specific instruments, etc.

When deciding whether to attract long-term financing, companies consider tax advantages in the first place.

However, as the share of debt increases, the risk of insolvency increases. Consequently, a situation may arise in which the costs exceed the benefits of financing the project with a loan.

The role of loans in financing long-term investments

A bank loan is a traditional source of debt capital for financing large investment projects, available to companies with sufficient assets to collateralize.

The obvious advantage of lending is the relative ease of obtaining funds, but this instrument may not be suitable for young companies implementing capital-intensive and long-term projects.

Loan agreements contain, in addition to the amount, interest rate and loan terms, the purpose of providing borrowed funds. The parties include in this kind of agreement a number of clauses with the conditions for adjusting the interest rate and other parameters, guarantees of return, the powers of the financial institution to control the use of the loan, etc.

The funds obtained in this way allow companies to invest in expansion, modernization and development at any time in the investment cycle.

The funds received must be returned on time.

The loan repayment method is indicated in the loan repayment schedule, which may include various options.

From the point of view of the borrower, the main factor in the attractiveness of a loan in the European market is its total cost. When determining a loan repayment plan, it is important to take into account the fact that long-term investments financed by a loan do not generate income immediately, but over time.

For this reason, the repayment of the loan, that is, the main part of the debt and interest, are paid with a certain delay (grace period). In exceptional cases, the entire loan, together with interest, is fully repaid only at the end of the repayment period.

An investor’s creditworthiness determines the likelihood of obtaining a business loan. If the economic and financial assessment is positive, the bank requires the borrower to guarantee the loan repayment. This is usually an official guarantee, which can be provided in the form of a promissory note. This is a written commitment from the issuer to pay off the debt within a specified time frame. After the loan is repaid, the promissory notes are returned to the borrower.

Blocking of term deposit funds is a reliable and convenient guarantee of repayment of loans provided by the bank.

Deposits placed with the bank that provided the loan are a kind of safety cushion for the lender.

Long-term business loans secured by real estate are popular due to their simplicity and reliability, in contrast to the pledge of movable property.

The pledge of movable property consists in the transfer of raw materials, goods, machinery or equipment to the bank against the issued loan. The bank receives all the powers to manage the pledged assets. The latter is a laborious procedure for the bank, therefore, the pledge of movable property is used quite rarely.

The implementation of long-term investment projects using bank loans is considered an easily accessible option only for companies with high creditworthiness that are in good financial health, as well as for newly created companies with a good business plan and adequate collateral.

Banks seeking to minimize financial risks may refuse to provide loans to financially weak companies, even if making long-term investments could theoretically improve their financial condition and bring more profit to the lender in the long term. In addition, only a loan that does not exceed concentration limits will be available to borrowers.

Another disadvantage is the high cost of obtaining a loan, so it is advisable to negotiate with several financial institutions to find an acceptable interest rate and maturity.

Additional costs will be associated with a multi-stage procedure for establishing the borrower’s creditworthiness.

A business loan, like a bond issue, is a source of borrowed funds, so investment failure can have painful consequences. A loan allows a financial institution, for example, to control and limit the commercial activities of the borrowing company.

In particular, bank specialists can access commercial and financial documents in order to constantly check the borrower’s solvency. This is unacceptable for many firms, despite the fact that banks are obliged to keep the state of bank accounts of clients secret.

Venture capital for financing investment projects

The main goal of long-term venture capital investments is to promote a new project, bring it to a mature stage and sell it to another investor.

Venture capital is a promising external source of financing for innovative enterprises associated with above average risk with an appropriate level of profitability.

The expression “venture capital” is usually associated with investments in unlisted companies, which are characterized by increased investment risk. Some institutions use this term only to describe investments in enterprises at the beginning of the business cycle, and all subsequent investments are called “development capital”.

Essentially, venture capital is associated with long-term investments in companies that offer potentially high profit opportunities.

A feature of this method of financing long-term investments is the fact that investors are waiting for business growth to maximize profits.

Venture capital provides unlimited opportunities for external funding, but from a practical point of view, it is difficult to find a partner willing to take risks with your team. In this context, enterprises that have concluded agreements with large players and enjoy the confidence of the market have an advantage.

For an investor, venture funding carries a very high risk that is not protected by any collateral. Joining such a project is an expression of the investor’s will.

However, the investing company can sometimes share the risks with other investors, who will share the profits in exchange for capital invested in a long-term project.

Venture capital is a fairly cheap source of funding.

This is due to the fact that a venture fund does not require regular payments from current profits, postponing the receipt of profits until the end of the investment process, when the source will be the income of a mature, successful enterprise.

Long-term investment projects that are funded by venture capital do not always meet the above criteria in practice. Currently, there are many types and forms of such financing.

Venture capital is viewed as equity financing under certain conditions in a certain category of companies. Venture funds promise significant returns in the early stages of development, however, investor risk is very high due to the inability to accurately assess the chances of a project’s market success.

The investor’s access to business management is also wide, especially in the field of marketing.

Experience has shown that venture capital funding usually precedes stock exchange funding.

Only companies with strong market positions, able to accept the failure of a particular venture, can afford to finance young, emerging companies, helping them to limit risk in the early stages of business. Only when a company stabilizes its position in the market after a few years and the risk associated with its activities decreases, its shares begin to trade freely.

Long-term investments as a factor of business growth

The term “investment projects” first appeared in the 1950s.

Around this time, the concept of long-term investments began to form, which now play an important role in the development of energy, infrastructure, industry and numerous other sectors of the modern economy.

Business loans in Germany has a long and strong tradition of business lending to driver her economy befitting to her citizens. 

The spread of the credit system began in the late Middle Ages. Large German lenders influenced politics by providing loans.

When the church ban on interest was abolished in the 16th century, the lending in Germany has truly blossomed. All citizens could take loans, since the debtor’s real estate was usually used as collateral.

To make it easier to issue mortgage loans, debts and ownership of property began to be registered in land registers from the 18th century. Since the entry into force of the German Civil Code in 1900, a single credit law has been in effect throughout Germany.

Since that time, the German banking system has gone through a long path of evolution, assimilating the best global models of business financing and strengthening them with its own principles and traditions. Nowadays, business loans play an important role in financing large projects, in particular projects based on project finance schemes.

This category includes land loans for developers, industrial loans and other forms of business financing that are widely used in Germany and other European countries to ensure sustainable economic development.