Western sunset; Eastern sunrise?

Every year we ask the question: “When will Asia pick up?” And with the US market on a rapid slowdown, this question has become even more poignant to OEMs and investors alike. Most experts agree Asia will continue to have a tough time this year – due as much to the global slowdown as anything else. But it is not all doom and gloom. There will be some action towards the end of the year with the main event on the calendar being the privatization of Singapore’s generating assets.

Commenting on the Asian market and Singapore in particular, Tom Metcalfe, business development manager at Mirant Asia Pacific said: “Markets in Asia are particularly exciting because unlike Europe and the US, Asia is just starting out on competition and deregulation. Markets like Singapore, South Korea, Japan, The Philippines, China and even Thailand are focussing on new market structures.

“Singapore is a good example. Although its GDP is forecasted to contract by 3.5 per cent this year, it is still going through the deregulation process and there will be assets up for sale this year. So even in these hard times we are still seeing opportunities to grow.”

Mirant is one of a number of companies planning to bid for Singapore generators: Tuas Power, Power Senoko and Power Suraya this year. From the second half of 2002, the power companies will be sold off sequentially, with three months between the sale of each generator.

The privatization of Singapore’s generators has been an ongoing saga for some time. The sale of Tuas has been repeatedly delayed over the last few years but it seems at last the time is right.

However, it is questionable whether Singapore needs to privatize at all – the sector functions well and the government certainly does not need the money. Another question is why would investors be interested in the market? The existing generators in Singapore are in the process of building new plant in a shift from oil to gas fired generation. The majority of this will come on line by 2003. Investors need to understand that the city state, which places an extremely high value on security of supply, has something like a 60 per cent reserve margin which will rise once the new plants come on line.

Metcalfe expanded: “Vesting contracts are believed to cover about 65 per cent of demand. With demand at about 5000 MW and a capacity of 10 000 MW, there will be a huge capacity chasing a small market. But it’s all about valuation. Hard lessons were learned in markets like Australia. We will do an evaluation on a discounted cash flow basis. We will be very prudent and will not get into a bidding war for these assets.”

While an investor’s success largely depends on getting the right asset at the right price, it is not always easy to put a price on the value of an asset. The book value for Tuas has been put at about S$1.7 billion. But most experts agree that book value is probably the worst way to value an asset. Another option is to use comparables i.e. look at other similar assets.

Assuming private investors do enter the market, the next question is: can such a small market with few players promote competition? Metcalfe believes so. “I think it will be fiercely competitive for the capacity which is not contracted. There are policies which can be introduced to bring more generators into the market and competition will increase over time. But anyone contemplating new generation

will have to think pretty hard given the high reserve margin.”

It remains to be seen how the Singapore market shapes up and how it might impact the rest of Asia. While everyone was confident the sale of Singapore’s assets would begin in the first half of 2002, the delay will mean that the sale of the assets may now overlap with sell-offs in other countries. And this could be a challenge. “There could be the situation where Singapore, Korea and The Philippines are all looking to privatize different parts of their assets at the same time. This will stretch companies like Mirant looking to bid in Singapore and South Korea. We will have to look closely at our resources when allocating time, money and effort in looking at two bids at the same time,” said Metcalfe.

No doubt many will be stretched this year, in Asia and elsewhere. Let’s hope the market gives before the players.

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