Cost of S$2.3 billion to take over Sports Hub comparable to government payments under partnership
SINGAPORE: The full cost of terminating the public-private partnership (PPP) for the Sports Hub is projected to be S$2.3 billion, said Minister for Culture, Community and Youth Edwin Tong in Parliament on Monday (Aug 1).
This aggregate sum would be “comparable to the financial obligation committed under the PPP if we had chosen to continue with it, without termination”, said Mr Tong in a ministerial statement about the sporting facility.
Sport Singapore (SportSG) announced on Jun 10 that it will take over the ownership and management of the Sports Hub from current operator SportsHub Pte Ltd (SHPL) on Dec 9.
SHPL, a consortium set up to build and operate the Sports Hub, was set to run the Sports Hub until 2035.
Mr Tong was responding to questions filed by Members of Parliament (MPs) soon after the announcement that SportSG would take over the facility.
His statement was meant to be delivered at a previous parliamentary sitting last month, but it was delayed until Monday as Mr Tong had contracted COVID-19.
A number of MPs, including Mr Seah Kian Peng (PAP – Marine Parade) and Ms Sylvia Lim (WP – Aljunied) asked how much the Government is paying in total for the early termination, and how it compares to what the Government would pay had the partnership continued until 2035.
Mr Tong explained that SHPL funded the full initial capital expenditure for the construction of the Sports Hub by taking out a loan.
“This meant that Government did not have to contribute any upfront capital for the construction in 2010,” he said.
When the Sports Hub was up and running in 2014, the Government paid SHPL a fee of S$193.7 million every year, and would have continued to do so until 2035 if there had been no early termination.
With this fee from Government, SHPL would then be responsible for the full operating expenditure of the Sports Hub and the assets would have been returned to the Government at no cost in 2035, said Mr Tong. This works out to be about S$2.32 billion.
He added that this does not account for net present value and other financial adjustments.
With the termination, the Government would have to pay SHPL for the termination according to the project agreement, and it would also have to pay for the future costs of running the Sports Hub.
Of this amount, a large portion - S$1.2 billion - can be understood as the capital expenditure that Government would have had to bear if it adopted the traditional procurement approach from the start, he said.
Another S$300 million or so is primarily made up of the fair market value of the Sports Hub which is commercially negotiated, and other costs, expenses and deductions, based on the project agreement.
Mr Tong added that the final amount will be based on the accounts in December at the handover, but the Government does not expect a “material variance” from the projected figure of S$1.5 billion.
He also outlined the costs of running and operating the Sports Hub post-handover.
Using the current operating assumptions and costs incurred by SHPL, the Government expects to incur about S$68 million per year as operating costs, said Mr Tong.
This includes future lifecycle replacement, maintenance and programming costs, as well as the day-to-day costs of operating the Sports Hub.
“If we were to draw a parallel comparison against the balance tenure of the project agreement ... that brings us to approximately S$800 million over the balance period until 2035,” he said.
“Taking the two buckets of costs to be paid for the termination – the sum to be paid to SHPL which largely reflects the upfront capital expenditure and future operating costs – this would be a fair deal for the Government on which to take back the assets,” he added.
He highlighted that none of the components are penalties to the Government for the early termination.
“There are simply costs we would have had to incur or would have incurred going forward,” the minister said.
HIGHER OPERATING COSTS LIKELY
“Notwithstanding the financial calculations and due diligence, I should, however, make clear that the decision to terminate the Sports Hub project was not driven by financial reasons, or to save money,” said Mr Tong, adding that the Government will not operate the Sports Hub the same way as SHPL.
To make Sports Hub more accessible and open to Singaporeans, there will be more community programmes, investments to bring in more world-class events, and opening up the Sports Hub and National Stadium more often for community use.
“All of this would probably mean higher expenditures and increases in daily operating and maintenance costs,” he said.
“As such, we should probably expect our operating expenditure on an ongoing basis, once we take over, to be higher than what we would incur if we merely continued with the status quo under the existing arrangement.”
But at the same time, the full revenue generated from the Sports Hub will now go to the Government, Mr Tong pointed out.
“Let me be clear ... even as we want to enhance community participation at the Sports Hub, and enhance our programmes, we must also do it judiciously. We must still operate with financial prudence and ensure that we are not profligate in spending,” he said.
“But taking back the Sports Hub from the private sector will also mean being able to redefine our outcomes away from being mainly or predominantly commercial in nature.”
Mr Tong said that this means the Government will be able to better realise its sporting and social objectives.
BENEFITS OF PPP
He also spoke about how the PPP approach allowed Singapore to benefit initially from the expertise of major international private sector partners, and for the risks to be shared with them.
“We have to remember that when we started exploring this, it was almost 20 years ago, in 2003,” said Mr Tong.
“At that time, neither the Government nor our local sporting and lifestyle/entertainment industries had sufficiently matured or developed depth of experience in bringing in marquee sports and entertainment events from all over the world.”
SHPL was chosen because each of the consortium partners had substantial expertise that was relevant to certain key aspects of the project, said Mr Tong. They were InfraRed Capital Partners for project financing, Dragages Singapore to design and build the facility, Cushman & Wakefield for facilities management and Spectra for venue operations.
Mr Tong said that the Government did not pay any of the upfront construction costs of more than S$1.3 billion. Its annual payments of S$193.7 million go towards SHPL’s debt service repayments for the loan they took out to finance the Sports Hub construction, as well as day-to-day maintenance and operations of the asset, he added.
The payments were also subject to and moderated by SHPL’s achievement of a broad and comprehensive range of key performance indicators, he said.
“Having no upfront costs for Government turned out to be useful, for instance, when the global financial crisis in 2008 hit unexpectedly,” said Mr Tong.
“As the Government’s fiscal resources were not tied up, we were able to use those resources to meet other pressing economic and other needs.”
The PPP structure also allowed Government to mitigate unexpected risks, such as when the project encountered construction delays, for which SHPL underwrote the costs. SHPL also bore the costs of addressing the defects such as the roof leaks, inadequate pitch quality and poor sound quality for concerts, he said.
“The PPP structure also ensured that there would be inherent financial discipline in the project ... This was a ground-breaking, novel project, and we had not undertaken a project of this scale before. It was therefore important for the Government to ensure that the costs would not run away,” said Mr Tong.
“This was achieved by ensuring that the consortium would have to bear any costs above their expectations and also return the assets back to the Government at zero cost at the end of the project period in 2035.”
Despite the initial advantages of this approach, the Government also envisaged that there would come a time when Singapore would be ready to operate the project, said Mr Tong.
This is why the structure of the PPP provides for a unilateral right on the part of the Government, but not SHPL, to terminate the project, and to take over ownership and management at any time before the expiry of the project, with no penalty.
Mr Tong said: “This reserves to Government the right to assess, at any time, if its interests might be better served by stepping in, to run the Sports Hub directly ... If so, there is an agreed mechanism upfront (to do this).”
Responding to questions from MPs, Mr Tong also spoke about how this early termination would affect future PPPs. He said that each venture has to be “considered on its own merits”.
“As I have outlined above, we had good reasons to terminate the PPP ... but having reached this decision, it does not necessarily mean that all other PPPs will not be considered or that the Government should no longer be open to other PPP projects in future,” the minister added.
He added that regardless of how projects are financed, there is a “sound evaluation process” to review and assess infrastructure projects. For PPPs, a framework is in place to assess their suitability and this is “continuously refined”.
“We will therefore continue to be open to leveraging PPPs as a model, where suitable,” he said.
IS PAYMENT TO SHPL FAIR?
MPs asked several supplementary questions on the ministerial statement, with Non-Constituency MP Leong Mun Wai (PSP) being the most persistent.
Mr Leong repeatedly asked Mr Tong about the projected payment of S$1.5 billion to SHPL, saying that his questions on that have not been answered.
He questioned the decision to build and operate the Sports Hub as a PPP, and asked why the decision was made in the first place.
He also said: "Throughout the discussion we had today, no one asked the question is the S$1.5 billion compensation or termination costs given to the private consortium fair, or not?
"Of course, then we have to go into a lot of details of financial calculations and all that, but we still need to debate about that. But so far, no question has been raised."
Throughout, Deputy Speaker of Parliament Christopher de Souza urged Mr Leong to ask his questions and make them succinct so that other MPs would have a chance to speak.
In response to Mr Leong, Mr Tong reiterated that the Government chose the PPP model because it wanted its partners to have "skin in the game" and bear the risk of the project, that there would be financial and market discipline in the way the project was structured.
On whether the terms of the termination are fair, Mr Tong said that it is based on a formula that was in the PPP agreement.
"The majority of this cost is the CapEx (capital expenditure) as I explained, and this is a CapEx that we would have had to bear had we undertaken the procurement model anyway," Mr Tong said, repeating explanations that he had made earlier.
He reiterated that the annual sum of S$193.7 million paid to SHPL goes towards servicing of loan obligations as well as operational and maintenance expenses.
"I've set out the premise of the payment, the formula by which this is done, and why I believe this is a fair assumption."
Following Mr Tong's reply, the deputy speaker called on Ms He Ting Ru (WP - Sengkang) to ask a question, but Mr Leong interjected, saying that Mr Tong had not answered his question.
Mr De Souza told Mr Leong that they have to give MPs in the House a chance to ask their questions, after which Ms He and Mr Sharael Taha (PAP - Pasir Ris-Punggol) both asked for clarifications on points in the speech.
Mr Leong was then given a chance to ask another question, which was: "Can I know why the Government is so generous to pay S$193.7 million a year to the private consortium, when you just mentioned that the operating costs after we take over will be about S$68 million (a year)."
Mr Tong replied: "One, it's not about being generous, this is what the contract says ... And secondly, Mr Leong may not have heard me, but the S$193 million is not just (for) the operation and maintenance, it is for debt service as well."
He added that "from memory", the single largest portion of the sum goes towards debt service. Upon further questioning by Mr Leong, he added that it was about 65 per cent of the total.
Mr De Souza then called Leader of the Opposition Pritam Singh to ask a question next, but Mr Leong again interrupted, saying: "We haven't got to the bottom of the thing.
"What is the point of having the debate without getting to the bottom of the thing? ... We must get to the bottom of the issue."
Leader of the House Indranee Rajah interjected at this point to comment on Mr Leong's conduct saying: "What the Standing Orders require is for the Minister to answer a question that is put. In this case, Mr Leong had put a couple of questions.
"Mr Edwin Tong had answered the questions. I think the fact that Mr Leong doesn't understand the answer doesn't mean that the question has not been answered."
Mr Leong protested this, and asked to respond to Ms Indranee as she was accusing him of not understanding "certain things".
Mr De Souza did not accede to his request and said: "The Chair has been very fair, I think you've spoken on this issue three or four times in this debate alone, and I asked you to give way to the member who I've just called, Mr Pritam Singh."
Mr Singh proceeded to ask a question on how much liquidated damages the Government has collected from SHPL since 2014 due to non-performance or when venues are not available for use. Mr Tong estimated this to be about S$44 million, but said this figure is "subject to checking".