More than one project finance banker in Singapore has confessed to coming in for an interview for the position of chief executive officer of the Project Finance Company (PFC). The new entity, established by the Singapore government- owned holding company, Temasek, will eventually get a new name and logo, probably after it gains a new CEO.

PFC’s business model and plans to fund its business have been the source of a great deal of speculation. The stated aim for the new entity is to plug identified gaps in funding for project and export financing. But in typical Singapore fashion, while it will be established by state-linked entity it is expected to operate on completely commercial lines. This makes some bankers nervous.

Three regionally active lenders – DBS, Standard Chartered, and Sumitomo Mitsui Banking Corporation – have signed up as cornerstone shareholders. Their presence should reassure project finance lenders that it does not plan on becoming a competitor, though Temasek in turn owns equity stakes in two of the shareholders, DBS and StanChart.

The roots of the initiative lie in the recommendations of the Economic Strategies Committee, which Singapore set up in 2010 to look at how the city-state might evolve from its roots as a manufacturing hub. It asked the city’s corporates what weaknesses they had identified in financing projects overseas and funding exports. The two unhappiest sectors were the infrastructure investment community, and large capital goods exporters, in particular Singapore’s shipyards.

Singapore’s corporates have expanded faster than its banks, and as project sizes have increased, this weakness in the ability of Singaporean sponsors to line up financing has become more glaring. Singapore had an export credit agency, the Export Credit Insurance Corporation of Singapore, which was established in 1975. But by the 1990s it had essentially ceased to operate, before being sold to IFS Capital in 2003 and emerging as a provider of short- and medium-term credit insurance. Singaporean sponsors have managed to win bids overseas, but have struggled to line up competitive debt support, particularly at longer tenors.

In its February 2011 budget, the Singaporean government gave Temasek the job of setting up an entity to address corporates’ funding needs, insisting that it would be run on a commercial, sustainable basis. Temasek began to look at the most active export credit agencies – in particular Canada’s EDC, Japan’s JBIC and Sweden’s SEK. But, according to one source familiar with the process, “none of the examples made much money.” Many of them enjoyed implicit or explicit government support. Korea’s Kexim, for instance, is able to put all of its losses back to the government of South Korea.

The response of European governments to the crisis, and particularly the willingness of ECAs to operate in domestic markets, offer concessionary terms to renewables borrowers, and guarantee bonds, increased the pressure on the Singaporean government to come up with a solution. The looming introduction of Basel 3 was also a factor in the decision to develop a financing institution, and the Eurozone crisis, which has led several European lenders to designate the Asian region non- core, increased the pressure to come up with a solution.

So, in the February 2012 budget, the government promised to provide a guarantee of the debt that the new entity would issue. The government of Singapore enjoys a triple-A rating from all three ratings agencies, giving any issue by the new entity a high rating, and the new entity a very low cost of capital. The entity itself, however, may not be rated, and may not be regulated, meaning that its new name would not include the words “finance” or “bank”.

The government guarantee is not unlimited, and the entity must still operate along commercial lines. Among the first jobs for the new chief executive will be to develop eligibility criteria for projects, and find up to 20 people to staff the new lender. Additional shareholders are likely to join the three banks that the government identified in its most recent budget.

But there is still some uncertainty in the market about how the PFC will operate, and how it will avoid crowding out commercial banks. If the company is not rated it will be unable to provide unfunded instruments like letters of credit to enhance bond issues or provide LC support to the construction obligations of, say, shipyards.

The combination of low-cost borrowing and financings to corporates operating overseas recalls the way the United States’ Overseas Private Investment Corporation (Opic) operates. Opic funds each draw on its loans to projects with the issue of project-specific, but US government guaranteed bond issues, and captures the spread between its borrowing costs and the rate that its borrowers pay. The processes of the PFC, however, will more closely resemble those of a commercial bank, according to one observer familiar with its development.

One option for the new entity would be to sell its loans to a specially-created listed business trust, whose obligations would in turn be backed by receivables from the loans that PFC would make and sell to the trust. The securities issued by the trust would be a hybrid of a single-project bond and a collateralised loan obligation. The listed vehicle would enjoy tax advantages, and would follow on from (equity-like) issues by such entities as the Hutchison Port Holdings Trust. The issuer, according to one executive at an established export finance institution following the development of the initiative, would be separate to the PFC.

The new management will still have to explain how the PFC will avoid competing with commercial banks, which display a remarkable capacity for bemoaning the presence of government-backed lenders even as their withdrawal creates the space for such lenders to gain market share. Secondments of staff, particularly during the establishment of the PFC, may help allay these fears.

There are certainly sponsors ready to benefit, including port operator PSA International, desalination developer Hyflux, Singapore Power and Sembcorp. If its eligibility criteria permit, foreign- owned infrastructure developers with a sufficient presence in Singapore may benefit. Several infrastructure sponsors have recently relocated from Singapore, complaining that the government’s cool attitude towards domestic PPP makes it uneconomic to maintain a base there. Low-cost PFC funding might give them cause to reconsider.