Lit Cheong CHONG, International Enterprise (IE) Singapore
Release Date: 2010-08-20
Singapore today is a global trading hub, in particular for the energy industry. Can you start with providing our readers an overview of the number of trading companies present in Singapore today and the importance of the offshore industry to the local economy?There are around 300 offshore traders that run their business from Singapore, of which approximately 40% are oil related. These are referred to as global traders as they buy for offshore, rather than local, consumption. Of course, the 40% is only the nominal amount of players, as the contribution in terms of revenue is much higher. Oil turnover is much higher compared to other offshore traders of steel, food, consumer products, etc.
Offshore oil traders choose Singapore because there is demand in this region. Both Japan and China are immense consumers for example. While there are not too many exporters, one would be surprised to see how many storage facilities there are in Singapore. The Jurong Town Corporation (JTC) is building underground oil storage to increase the overall storage capacity of Singapore and ensure that the oil traders can price their product accurately and better manage their risk.
Another plus in terms of price discovery is the presence of a company based here called PLATTS that certifies the quality of oil which, in turn, defines the pricing of the product. They certify where are the delivery points, of which storage is one of them. This attracts oil traders because they know the latest price points can be found here.
You mention there are many oil storage facilities but at the same time the industry is restricted due to limitations of physical expansion. How can Singapore and International Enterprise (IE) deal with this challenge?
Together with the Economic Development Board (EDB) and JTC, IE needs to determine how much oil storage should be available for the traders on the one hand and for downstream production on the other hand. The value added in downstream production is much larger so the balance between the two needs to be carefully considered. The underground cavern JTC is building will be used for trading and will increase capacity by approximately one quarter of the total annual consumption of oil.
Singapore is clearly running out of space and increasingly offering companies facilities in neighboring places such as Johor Bahru in Malaysia or the Karimun Islands in Indonesia. Next, IE works together with PLATTS to certify the delivery points in these locations. This is one way to extend the physical boundaries of Singapore.
Many of the neighboring countries are also becoming competitors for Singapore as they develop their own trading hubs. How can Singapore retain its position and sustain its competitive advantage?
There are two ways to look at this. First, by looking purely at the trading segment, it is correct that storage is also starting to take place outside of Singapore. It is possible that Malaysia decides to become a trading hub. We also know the trading operations are not that location-bound as it is possible to move people around. Storage is only one part of the equation. Ultimately, oil traders want to avoid places with too much bureaucracy. Traders are expensive human resources that need good schools for their families, a sound banking environment and so on. While Singapore is still behind places such as London, it is ahead of other countries in the region. Thus, when rating the attractiveness of a location for oil traders it is necessary to take the services side into account and look beyond physical storage facilities. Some other locations attract people by giving zero tax, of which Dubai is a good example. Dubai is obviously a competitor even though it has its own challenges to cope with.
The hard figures show that the offshore trade turnover went down from SGD 673 billion in 2008 to SGD 475 billion in 2009, a significant decrease. What is the outlook today?
This year there will be double digit increase compared to the low base of last year. In the meantime, Singapore’s GDP is growing very strongly again while the oil price has also stabilized.
One of the ways IE wants to contribute to Singapore keeping its energy and trading hub status is through its Global Trader Programme which recently resulted in Gazprom starting trading activities in Singapore. How can IE facilitate the entry of such oil majors into Singapore?
On the trading side of energy products, Singapore has traditionally acted as a hub for oil trading. Over time, Singapore has found its way into gas, LNG and carbon trading. At this stage, much of Gazprom’s LNG is being traded from Singapore now. Both Shell and BP have gas fields in Australia and Sakhalin that are sources of LNG for which the trade is taking place in Singapore. LNG trading is thus considered as one of Singapore’s offshore trade products.
The carbon side is still a very new area. Carbon trading is not entrenched in Singapore yet, but IE tries to help to position Singapore in this regard. In a first phase, the goal is to develop Singapore into a centre where we have talents to qualify production plants which can sell carbon units. For example, when a new green power plant is built, there is room to sell carbon products of which most go to Europe. But to do so, someone needs to visit the plant, check and certify how many carbon units that particular plant can sell. Singapore is ideally located between China, Papua New Guinea, Indonesia and so on, making it a very attractive cosmopolitan location to attract people with such certification skills. Once a particular source of carbon can be identified for sale, Singapore will also be able to become a carbon trader. In sum, there is thus an extension of Singapore’s trading activities from oil to LNG and carbon.
The next question is how to motivate people to move from oil to LNG and carbon. One answer is the fact that the sources of demand and supply are in this region. Secondly, LNG trading is sophisticated because it requires long term contracts. Because of these long term contracts, long term tax incentives are being asked for by the different players in the industry. This is something Singapore can be very flexible in. While most incentives cover 5 to 10 years, LNG traders are now asking for a period of 20 years. For the government to give a company a twenty-year proposition, it will need to have a clear plan, growth strategy and show clear commitment to its goals. On that basis, the government is prepared to commit to long-term incentives. This entire process strongly relies on mutual trust. Companies must have the confidence that the country will recognize the incentive for 20 years, and need to find that Singapore can offer political stability and consistent policies. Singapore has the ambition to move into the direction of longer term incentives to create a better trading environment for these new products.
When interviewing Mr. Tan Poh Teck of the Singapore Business Federation, he mentioned the role of tripartite arrangements where Singapore companies can bring the knowledge of local Asian markets when partnering with MNCs. IE tries to help Singapore companies to expand overseas as well as attract companies from abroad. To what extent can you play a role in facilitating local – international partnerships to enter third markets?
These partnerships are companies’ decisions at a firm level. The success of their partnership will depend on the mutual values between the companies and the chemistry between the individual decision-makers in the agreement. Without this chemistry, there will not be any sharing of the growth strategies of both players. For example, there are Middle Eastern companies that want to enter China in partnership with Singapore companies. But some companies may be reluctant in sharing their local network and losing any advantage they have in regional markets. There are not too many such projects, but IE does have the ability to play the role of facilitator and such projects do bring with them huge benefits. For example, when SembCorp wanted to invest in a utility and treatment plant in Oman, they wanted to raise financing which they were unable to do so in Singapore. Therefore, IE introduced SembCorp to the China Development Bank which eventually resulted in a financing agreement. In addition, arising from the financing, Chinese contractors are now asking to participate as a service provider to SembCorp. In my view, this is one example of how IE can play a role in tripartite agreements. Nevertheless, it will always remain at high-level facilitation rather than commercial discussions.
If we look at helping Singapore companies to move into China, one of the advantages is that Singapore can leverage the bilingual skills of its ethnic Chinese majority to do business with or in China. In a news article last year your comment stated that Singapore companies are different when they look at issues than their Chinese counterparts, so the next step would be to see China in a Chinese perspective. What is IE’s role in achieving this?
When we work with China, there are roughly four layers in place. The first and lowest layer covers the business to business connection. This means that a mission to China is organized where the company can get in touch with a local player that can be a buyer, a joint-venture partner and so on. This layer is referred to as the business to business matching.
The second layer is referred to platform projects. This means that IE will look for larger-scale opportunities. For example, one of the city governments may ask Singapore to work on a new township project. A township project will require many different companies such as architect firms, planners, developers, water treatment plants, power plants etc. IE participates in this by scoping the project, bringing companies to explore the viability and eventually integrating the project by bringing in the master developer, the master planner and so on.
The third and fourth layers comprise government to government partnerships. IE now has two high-level government projects running in this range in China. The G to G projects at the national level enjoy support from the Chinese central government in coordination with the Singapore government. On another note, there are also smaller-scale G to G projects at the provincial/city level, which are not endorsed at the national level.
A key market beyond Asia for oil and gas is obviously Brazil. At a micro-level, we have already seen Keppel and SembCorp Marine moving into this market, as well as various other Singapore players. What are the key capabilities that Singapore companies can bring to a market as Brazil?
The first goal is to have Brazil using Singapore as an offshore trading hub. For example, Petrobras is here. So we want to attract such players for inward investments, get them to set up trading operations here.
Secondly, the governments of Rio de Janeiro and São Paulo are also interested in constructing large petrochemical parks similar to Singapore’s Jurong Island. SembCorp, Jurong shipyard or Keppel are already present and active in Brazil’s market in shipbuilding or refineries. If they can go beyond these, such as building petrochemical parks, we can add more value. It is the experience from Jurong Island that we as a nation can export abroad.
There are two key elements that make Jurong Island work - efficiency and reliability.. Many of the companies on Jurong Island for example do not have waste treatment, chillers, etc. because they rely on central treatment and central chillers provided by outsourced service providers. Jurong Island has proven that it can reach the high level of reliability to make things work. There are talks now about implementing a similar hub in Brazil to which many of the Singapore companies servicing the Jurong Island clientele can supply their services too.
Even Turkey has looked into this option and is asking Jurong International to do the master planning. Another advantage of Jurong Island is that it is very well secured. The security system alone already cost SGD 40 million to build. As a result, the costs to operate on this island are less because the overall insurance premium comes down due to reduced risks. Despite being industrial, there is also a lot of green on Jurong Island. The mixture of these elements makes the concept quite unique and interesting for foreign governments to look into.
In the coming five years, what will be some key projects IE will have participated in?
The idea of moving from lower-level business to business matching to higher-level platform and provincial/city level G to G projects can really add value and be beneficial to more people. IE currently has some 20 platform projects in the pipeline that will pay off in the coming years. Also, when Singapore companies go overseas, we always keep in mind what the real benefit will be for Singapore. Intuitively, it is not hard to understand that there is a benefit, but it is a challenge to quantify this in actual numbers! If IE helps a company to export, it is easy to identify the quantity of export as the quantitative benefit. However, when IE helps SembCorp to set up operations in the Middle East or Oman for example, it is extremely difficult to calculate the quantitative benefit for Singapore. Quantifying the value captured from such operations is a challenge that the agency will keep working on in the coming years.
Eight years ago when the Trade Development Board was renamed to IE Singapore in 2002, IE was not quite sure how important the agency’s role would become. Today, IE realizes its role is very important and every company it spoke to now has an internationalization plan. In the past, there has been concern that this would hollow out Singapore’s economy but the contrary is true, with value being added from international exposure. The question remains, how to quantify this value?
There will be differences per sector in quantifying measures, for petrochemical projects, architectural projects, commodities etc. will have different backward linkage. Nevertheless, IE will try to find a way to measure the value. No
One example of what IE discovered is the following. The commodity sector is present here in Singapore but most of the time they do not produce anything in Singapore which takes place overseas. It is however possible to quantify all the added values that does take place in Singapore, such as the supply chain management, financing, trading etc. Thus whenever IE helps such players expand into a foreign market, it can gain some clarity on the percentage of that value which is attributable to Singapore. For the commodity sector, the backward linkage is approximately 30%, while other sectors such as electronics is very low. In sum, we are learning to identify these values at a sectoral level.
On a more personal note, what message would you like to send out to some of our readers that may look into investing into Singapore?
Singapore is a cosmopolitan platform to do business in the Asia Pacific region. Sometimes, the word arbitrage is used to describe Singapore’s position, because it is central to the flow of values, money, information and people. If Singapore can keep playing its arbitrage role as it does today, it will be able to retain and add value. Without growth, changes and innovation, the country will be in trouble. The recent crisis has given Singapore the opportunity to make a big difference. Singapore is always changing, which is very important to remain a platform to address the Asia Pacific markets.
| Company: | International Enterprise (IE) Singapore |
| Position: | Chief Executive Officer |
| Country: | 新加坡 |