Sing Kung has applied a BT (Build-Transfer) business model to its development projects, tailored to the specific opportunities and risks of municipal infrastructure development in China.

BT refers to a form of project execution wherein a private entity such as Sing Kung receives a contract from a municipality or public sector entity to do engineering design, fully finance, and construct, on a turnkey basis, a specified project. Upon completion, the private developer then transfers the project to the public-sector customer in exchange for fixed payments over a specified (usually 6 to 8 years) period of time. In addition to transferring the burden of project planning and execution to a private sector counterparty, the BT model places primary responsibility for organizing financing onto the developer. This is particularly useful for government project sponsors in situations such as those prevailing in China, where there is no organized municipal financing market and the process for arranging direct government funding or budget approval is often long and fraught with political challenges. However, such situations create substantive challenges and risks for private-sector BT counterparties.

The majority of BT contracts committed or currently planned by Sing Kung are for modest-sized (often multi-phase) infrastructure projects with second or third tier cities that management believes can benefit the most from its proprietary blend of services and support. The infrastructure projects tend to be comprised of multiple elements including roads, sewers and drainage systems, small bridges, and water and power distribution lines – relatively simple to execute project elements that can be completed within a short time frame, have predictable costs, and can be implemented by numerous local sub-contractors. Taken together, however, these infrastructure elements are foundational and their completion and connection to a city’s infrastructure grid is often essential to attracting commercial, residential or industrial developers, end-users to a project, an increase of local revenue, more job opportunities, and to winning financing approval from lenders to the city or to the project.

An essential step in Sing Kung’s project origination process is its top management assessment of whether or not a project will enjoy a favorable market reception and economic success when completed. If Sing Kung is involved in the creation of project development strategy for the city, it fosters a deep understanding of this topic. Comfort with each project’s economic prospects is important both to Sing Kung’s assessment of the project’s financial risk and to its potential to enhance investment returns and liquidity through accelerated BT contract payments. Sing Kung’s BT contracts always incorporate provisions designed to accelerate payment of the BT obligation.

Since almost all of China’s small and mid-sized cities operate with at least modest deficits before giving effect to provincial and central government distributions, it is essential to have first-hand knowledge of the city’s management strength, likely priority for the distribution of loan or grant funds given government policy guidelines, the political factors that could influence payment priorities, the profile of the city’s future level of commitments and finally its historical track record of meeting obligations. Sing Kung has developed reliable sources of information and the internal capability to assess municipal counterparty risk and objectively and to critically evaluate the financial risks of each BT investment opportunity.

Under the BT model, capital intensity for developers is high. Based on the limited information available for these projects in China, Sing Kung believes that the long-term risk-adjusted returns are at the high end of the international norms for this type of project due to capital-market inefficiencies in China and intense pressures to quickly implement urban infrastructure projects.