26 April 2017

Infrastructure Investment: The Supply Chain Connection

The investment in infrastructure projects like roads, ports and rail systems spurs the growth along supply chains that ultimately create more business opportunities for Singapore’s economy.

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Cherie Teng

Managing Director and Head of Corporate Banking, HSBC Singapore

Infrastructure projects – power, roads, airports, water systems and telecommunications have a huge multiplier effect on the economy. Past examples have shown that a dollar spent on infrastructure leads to an outcome of greater than two dollars1.

Building an integrated transport expressway like Singapore's North South Corridor (NSC) not only generates direct employment through its construction, but also creates growth opportunities for businesses supporting this project thus benefiting companies along the entire supply chain.

Growth usually occurs in three ways:

  1. Spending on construction and materials results in growth opportunities for suppliers.
  2. Increased consumption due to an increase in employment and hence a larger consumer base.
  3. Good infrastructure creates compounded value.

Let's look at this in detail.

Links in the chain

It's the Land Transport Authority's (LTA) role to plan, operate, and maintain Singapore's land transport infrastructure and systems. The LTA maps out the plans for the various projects, sets the goals, criteria and budget and then kicks off the tender process.

As an integrated highway, the construction of the NSC includes tunnels for the underground expressway, cycling tracks and bus ways. Typically this work will be bid for by primary project managers and contractors.

These bidders are likely to be construction and engineering firms, both domestic and international. Once the main project managers and contractors secure their bids, they will in turn award contracts to various suppliers of goods and services kicking off further rounds of bids and tenders.

Take the case of the construction of an expressway. Contractors and subcontractors will need raw materials such as steel, cement as well as specialized equipment for construction. This demand for materials and equipment benefits steel importers, equipment manufacturers and cement producers.

These projects will require engineers, independent quality surveyors, project managers, equipment operators and bank financing. This in turn will benefit companies providing these services.

As such, a supply chain is created, generating demand, jobs and contributing to Singapore's gross domestic product (GDP).

Going down the chain

It's a natural progression into the second channel of growth. More jobs lead to a larger consumer base with more people pumping money into the economy both in terms of consumption and labour.

This brings us to the third avenue of economic activity – good infrastructure creating compounded value.  

According to HSBC Global Research, the sectors that are likely to benefit from the NSC are business services, wholesale and retail, finance and insurance, other business industries and transportation and storage.

The government in its FY2017 budget, plans to bring forward $700 million worth of public infrastructure projects to start this year and next2. This is in support of the construction sector. Factor in the multiplier effect and this becomes over a billion dollars in economic activity in a space of two years.

As the NSC is valued at between $6 and $8 billion we're looking at the very least, $12 billion worth of economic activity based on past examples which have shown that a dollar invested in infrastructure leads to an outcome of greater than two dollars3.

Additionally, good roads and transport links benefit a wide array of businesses, particularly in the retail trade and logistics arena. It makes these domestic services more competitive, helping them to drive down costs.

That's the NSC's projected contribution to Singapore's growth mapped out. The NSC's targeted completion date is 2026. 

1 http://www.frbsf.org/economic-research/publications/economic-letter/2012/november/highway-grants/

2 Singapore Budget 2017, Pg 6

3 http://www.frbsf.org/economic-research/publications/economic-letter/2012/november/highway-grants/

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