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Bill paves way for borrowing to fund major infrastructure

Bill paves way for borrowing to fund major infrastructure

Source: Straits Times
Article Date: 06 Apr 2021
Author: Tham Yuen-C & Justin Ong

Loans of up to $90b for projects that last at least 50 years, benefit multiple generations.

A new Bill introduced yesterday will pave the way for the Government to pay for major national infrastructure projects through borrowing, something that has not been done since the 1990s.

The proposed Significant Infrastructure Government Loan Act (Singa) will allow the Government to borrow up to $90 billion to pay for infrastructure that will last for at least 50 years. This means the cost will be spread out over many years, with each generation that benefits bearing part of it.

Said Deputy Prime Minister Heng Swee Keat in a Facebook post shortly after he tabled the draft law, which will be debated when Parliament sits next month: "Singa will allow the Government to borrow to finance nationally significant infrastructure that is critical for our long-term development.

"We are making significant investments in the coming years - such as the Cross Island and Jurong Region MRT lines, and the Deep Tunnel Sewerage System.

"Borrowing for nationally significant infrastructure will spread this lumpy expenditure across the generations who will benefit. This is equitable across generations."

Singapore last borrowed for infrastructure in the 1970s and 1980s, to pay for the large upfront costs of building Changi Airport as well as the Republic's first MRT lines. By the 1990s, with the economy growing rapidly, the Government paid for infrastructure in full from its revenue.

The country now faces another hump in its development spending needs, with plans for new rail lines and coastal protection measures against rising sea levels.

This comes amid a tighter fiscal situation, exacerbated by the Covid-19 pandemic. Singapore is expected to record a Budget deficit of $64.9 billion in the 2020 financial year, and is expecting to record another deficit of $11 billion in the 2021 financial year.

During his Budget statement in February, Mr Heng mooted the idea of borrowing to fund major infrastructure projects, explaining that it made sense with interest rates close to zero.

He said that it was also a fair approach, as it would allow costs to be spread out among the generations of people who will benefit from the infrastructure.

He said safeguards would be in place so that the money borrowed is used sustainably and responsibly.

First, only certain "nationally significant infrastructure" can be funded under the law. This is infrastructure that supports national productivity or Singapore's economic, environmental or social sustainability.

Examples include major highways, structures to supply, recover and treat water, and structures - such as sea walls, groynes, dykes, floodgates, barrages and coastal pumping stations - to mitigate risks from coastal hazards.

Such infrastructure must last for at least 50 years, so as to benefit multiple generations. It must also be owned by the Government and be controlled by it, or on its behalf.

Another criterion is that the expected cost of the infrastructure project should be at least $4 billion.

Second, to avoid onerous financing costs for future generations, the Government can raise only up to $90 billion of loans in total, under the proposed law. This comes up to slightly under 20 per cent of today's gross domestic product.

The Ministry of Finance (MOF) said the amount is calculated based on expected expenditure needed to develop nationally significant infrastructure over the next 15 years.

There is also an annual interest threshold of $5 billion. Once it is breached, the Government will not be able to raise any more loans under the proposed law in the next financial year.

These limits can be changed only by passing a new Bill in Parliament to amend Singa, said the MOF, adding that this is to hold the Government of the day accountable if it wants to borrow beyond the prescribed limits.

For a start, the bulk of the borrowing will go towards funding the new Cross Island and Jurong Region MRT lines.

In his Facebook post, Mr Heng said borrowing allows the Government to tap the debt market for Singapore's long-term development. "With Singapore's AAA rating and the current market environment, we are likely to be able to do this at favourable interest rates," he said.

"Nonetheless, borrowings must be done responsibly and sustainably. After all, today's debt will be paid for by tomorrow's generation."

Thus, he said, the Bill includes strict safeguards on the projects that qualify for borrowing, and the amounts that can be borrowed.

OCBC economist Selina Ling reckons the absolute cap of $90 billion on borrowing will serve as an additional safeguard against any potentially profligate debt financing, and believes the move will not affect Singapore's sovereign credit rating.

"There are clear safeguards for the Singa programme with very well-defined and tightly managed criteria for what qualifies for Singa," she said. "In particular, any amendments to the gross limit and the annual interest threshold would require passing a new Bill, so this should give some reassurance to the market that Singapore's fiscal position and financing framework remain robust."


Borrowing for nationally significant infrastructure will spread this lumpy expenditure across the generations who will benefit. This is equitable across generations.


Budget debate: MPs stress need for prudence as S'pore borrows to fund major infrastructure

Singapore has to move with the times in how it manages its finances - just like how it introduced its Net Investment Returns Contribution (NIRC) framework in 2008.

But it is just as important to remain steadfast to the values of prudence and discipline, and operate on a balanced budget while jealously safeguarding reserves for future generations, said MPs on Wednesday (Feb 24) during the debate on the Budget statement.

Citing the Government's plan to issue up to $90 billion of new bonds to fund major infrastructure projects, Mr Liang Eng Hwa (Bukit Panjang) said: "If these items are funded under the annual Budget cycles, which is on a cash flow basis, it will put significant strain on our other Budget allocations."

As the long-term infrastructure benefits current and future generations of Singaporeans, it would be more equitable to distribute the fiscal responsibility across generations through such a longer-term financing structure, he added.

The NIRC refers to returns on investments of Singapore's reserves, and is the top contributor to government coffers.

In his Budget statement on Feb 16, Deputy Prime Minister Heng Swee Keat announced that under a proposed Significant Infrastructure Government Loan Act (Singa), bonds issued would finance a pipeline of major projects like MRT lines and tidal walls to protect against rising sea levels.

The borrowing limit will be set at $90 billion, among other safeguards to be included in legislation.

Mr Liang said this was a necessary safeguard on top of scrutiny from both the President and Parliament, while Ms Foo Mee Har (West Coast GRC) asked how this $90 billion limit on debt issuance was set.

"Would this limit be adjusted as GDP (gross domestic product) grows?" she added. "How vulnerable would we be if interest rates move up? What is the expected repayment burden on future generations? How would Singapore's AAA credit rating be impacted with the borrowing?"

She noted that the Government has not borrowed since the 80s for infrastructure development - namely for the country's first MRT lines and Changi Airport Terminals 1 and 2.

In the intervening decades, strong GDP growth meant such spending could be covered by operating surpluses instead.

Still, the MPs said they supported funding major, long-term infrastructure through borrowing, particularly given prevailing low interest rates.

Mr Liang, who chairs the Government Parliamentary Committee for Finance, Trade and Industry, said: "Having a wider variety of high-quality assets like Singa and green bonds also helps develop our capital markets and facilitate better liquidity management among our financial institutions."

Ms Foo said the use of debt would go some way in reducing the pressure of raising revenue, while avoiding the crowding out of important long-term infrastructure investment.

But she also stressed the need to exercise "great" discipline in deciding how much is borrowed and what is borrowed for.

"There is good debt and there is bad debt," said Ms Foo. "We must guard against going down the slippery slope of other countries where the burden of debt repayment becomes a major component of the country's finances."

The Singapore Government does not borrow to fund recurrent spending in areas such as healthcare, pre-school education and security. These are financed by recurrent revenues such as the goods and services tax (GST).

Noting it would unsustainable to do otherwise, Ms Foo said: "It is in this same spirit that we would not borrow money to pay for daily consumption. We would, however, borrow to invest in our flat, to provide a long-term home for our family, and an asset in our retirement."

Mr Liang also suggested that if fiscal conditions remain tight, the Government could undertake "special purpose borrowing" to fund investments related to helping Singapore emerge stronger from the crisis.

This would be an alternative to drawing on past reserves - which Mr Heng had said the Government would consider doing, to sustain investments in Singapore's future economy should the need arise.

Mr Liang said the reserves should only be touched as a last resort.

"Each time we draw on the past reserves, it also means divesting a part of our financial investments and hence we will lose out on the returns from these investments over the long term."

Instead, the Government could explore a one-off bond issuance earmarked to specifically fund Covid-19-related economic investments, he said.

"That way, we also take advantage of our very strong balance sheet and our high credit ratings, where we can enjoy borrowing at almost zero credit cost as well as to take advantage of low long-term interest rates.

"As a prudent safeguard, we should also still set strict caps on such borrowing, and it should be still subject to the approval and consent of the President and to parliamentary scrutiny."

Source: Straits Times © Singapore Press Holdings Ltd. Permission required for reproduction.


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