Debated in Parliament on 10 May 2021.
Deputy Prime Minister and Minister for Finance.
Mr Deputy Speaker, Sir, I beg to move, "That the Bill be now read a Second time".
Sir, first, let me set the context behind this Bill. To do so, may I ask the Clerk to distribute the handout, please?
Please do. [A handout was distributed to hon Members. Please refer to Annex 2.]
Members may also access this handout through the SG PARL MP mobile app. Mr Deputy Speaker, over the next 15 years, Singapore will be making bold investments in major infrastructure that will benefit both the current and future generations. This generational upgrade in our infrastructure will greatly enhance the connectivity, liveability and sustainability of our home. Taken together, we expect an upcoming hump in development expenditure of around 5% of GDP annually, higher than our baseline or average development expenditure of 3.7%.
This expenditure is over and above other infrastructural investments that we will continue to make, in areas like building more healthcare and education facilities.
We plan to build new MRT lines such as the Cross Island Line and Jurong Region Line. MRT is the most efficient and greenest mode of transport. We want to raise the mass public transport modal share during peak hours from 64% now to 75% by 2030. New MRT lines will move us closer to the vision of a 45-minute city with 20-minute towns by 2040 and bring greener transport options closer to more Singaporeans.
Another example is the Deep Tunnel Sewerage System, or DTSS. The DTSS will meet our long-term needs for used water collection, treatment, reclamation and disposal. As part of the second phase of DTSS, the Tuas Water Reclamation Plant will be able to treat up to 800,000 cubic metres of used water per day. This is equivalent to 320 Olympic-sized swimming pools. This will enhance our water resilience, in the face of larger fluctuations in rainfall.
Other examples of major, long-term infrastructure that we are building or expecting to build include major highways, such as the North-South Corridor which will alleviate congestion on the CTE, as well as coastal protection infrastructure to protect us against rising sea levels caused by climate change. Agencies are already embarking on site-specific studies at our coastlines, to examine potential measures like sea walls and polders. We expect more expenditure on climate change beyond 2030.
This Bill before the House today will permit the Government to borrow for these major, long-term infrastructures, subject to strict safeguards, under the new Significant Infrastructure Government Loan Act, or SINGA for short.
Given this upcoming hump in development expenditure that I just described, borrowing is a fair approach, because it allows each generation that benefits from the infrastructure to pay for its share. Otherwise, taxpayers in the next decade will need to finance much of this lumpy infrastructure that has a useful life of 50 years or more.
Borrowing in this context is also efficient. First, with Singapore's AAA rating, we are likely able to tap the debt market at favourable interest rates.
Second, by borrowing instead of drawing on investments, our reserves can remain invested to earn returns. We can tap on these returns to supplement our Budget through the Net Investment Returns Contribution, or NIRC. Other alternatives to borrowing include raising taxes temporarily, diverting resources from other spending needs such as social spending, or delaying significant infrastructure investments; however, all these options would be less efficient and more costly to the nation.
Borrowing for infrastructure is not new. As a fledgling state with no natural resources, we had borrowed to finance large infrastructure investments to help build Singapore in the past.
Singapore launched our first Development Plan in 1961, an ambitious $871 million plan to kickstart industrialisation and economic development. We borrowed from the World Bank and the Asian Development Bank, and paid these debts back steadily and on time.
In the 1980s, we borrowed to finance a wave of major infrastructure projects that we continue to benefit from today. These projects include Changi Airport Terminals 1 and 2, and our first MRT lines, the North-South and East-West lines.
By the early 1990s, our economy was growing rapidly, aided by our young demographic. This led to buoyant revenues, which allowed the Government to meet all its expenditure needs and pay down the earlier debts. In addition, with prudent management of our finances, we were able to run healthy Budget surpluses and build up our reserves. There was no need for us to borrow to pay for major infrastructure expenditure.
While we must continue to build for our future, including significant infrastructure, such as MRT lines and coastal protection infrastructure, our economy and demographic are now more mature. Given our ageing demographic and less scope for catch-up productivity growth, we cannot expect our economy to grow rapidly in the future.
Hence, we will not have the same buoyant revenues as before to pay for large infrastructure expenditure upfront. Instead, we will reactivate Government borrowing.
Our approach on borrowing should remain prudent and disciplined.
First, we will not borrow for just any kind of development expenditure. We will set a high bar for qualifying projects that can be financed by borrowing.
Second, we must ensure that we do not overly burden future governments with high debt servicing costs, which will reduce the resources available for spending on worthwhile services and subsidies for our people. Hence, we will impose both strict borrowing and interest limits.
We have benefited from the prudence of previous generations, who set aside surpluses then, when our economy was growing rapidly. This is why we have our reserves and a Reserves Protection Framework. Let us not forget that the opposite of reserves is debt. Today, the NIRC adds about 3% of our GDP to our total revenue. For most advanced economies, 1%-3% of GDP is spent on debt servicing costs.
We must be careful not to slide from a position of having net assets to one of having net debt. Otherwise, instead of having assets that earn a stream of earnings to add to our revenue for future spending, we will be committing resources to servicing debts incurred by earlier generations.
Mr Deputy Speaker, I will now explain how we have included these safeguards in the Bill, which will apply in addition to the Reserves Protection Framework.
The earlier Development Loan Acts in the 1960s to 1980s that permitted Government borrowing for spending on development did not set out criteria for the type of development that qualifies. However, given that our economy is maturing and we are no longer expecting the same high growth and high fiscal surpluses as before, we have set out a prudent and disciplined approach.
Today, all Government development projects go through a rigorous multi-stage evaluation process to ensure project worthiness and cost effectiveness. All infrastructure projects will also need to obtain Ministers' approval before they can be built. SINGA projects will undergo the same scrutiny.
In addition, under the SINGA Bill, nationally significant infrastructure projects must satisfy four requirements.
One, it must be major in size. Two, it must be important to Singapore's national interests and benefit the general public. Three, it must last multiple generations. And four, it must be owned by the Government.
First, nationally significant projects will have to cost at least $4 billion. This is set out in clause 11(5a).
Nationally significant infrastructure projects tend to be big-ticket items as they are major and complex in nature. The $4 billion threshold will capture major, lumpy development needs that form the upcoming "hump" above our baseline development expenditure.
It will also exclude smaller-scale infrastructure, such as schools and polyclinics. Such smaller scale infrastructure makes up the base of our annual development expenditure and should continue to be funded from taxes and other revenues.
Clause 11 of the Bill sets out the criteria for determining the costs of the project.
First, recurrent expenditure related to the nationally significant infrastructure, such as costs of repair and maintenance and purchase of vehicles, is excluded.
Second, the cost of acquiring land is excluded as well.
Third, the Bill permits projects to be built in phases, such as our MRT lines. Where these phases have been planned for right from the start, the costs of all phases of the infrastructure project can count towards the $4 billion threshold, if the different phases or components of the project are linked either physically or operationally. In short, we can view such a project as one system of integrated and inter-connected components.
For example, the cost of the entire Cross Island Line will count towards the same project value threshold because all its stations and rail tracks are physically connected to each other. The entire Cross Island Line is also expected to operate in its entirety, interchanging with all other MRT lines, existing and planned.
In the case of the different infrastructure components that are required to protect us against rising sea levels, they are linked operationally but not physically. They may not be physically connected to each other because they may be triggered at certain locations. However, the costs of these components will also count towards the same project value threshold because the components need to work in tandem to protect our coastlines.
For separate infrastructure projects that are not linked physically and can operate independently, the SINGA does not permit these projects to be bundled together in order to meet the $4 billion threshold. For example, the costs of individual hospitals will not count towards the same project value threshold, as each hospital can function as a standalone. When one hospital is down, other hospitals can continue to run and they may even pick up some of the slack in providing healthcare capacity. In contrast, if a component of an MRT line or coastal protection infrastructure is not built, the whole system would not be able to function as intended.
I turn to the second requirement, which requires the infrastructure project to be important to our national interests and benefit the general public in Singapore. This is set out in clause 2, under the definition of "nationally significant infrastructure", as being one that is "likely to materially improve national productivity or Singapore's economic, social or environmental sustainability" and in clause 2 as being "intended principally for use by or for the benefit of the present and future generations of the general public".
New MRT lines will qualify, because these enhance liveability, promote economic activity by improving connectivity and are the greenest mode of transport in the long run.
The Bill provides a list of examples that meet these objectives, such as transport infrastructure, climate change-related infrastructure, as well as utility network infrastructure. This list is non-exhaustive. This is because we can never know today, what we may need in the future. What is important is that we are targeting those projects with benefits that accrue widely to Singapore as a whole, or to a large majority of our people.
In order to adhere to the spirit of this thinking without trying to predict too far into the future, we have safeguards that I have mentioned earlier, to ensure that the Government will use this carefully.
The third requirement, as set out in clause 11(2), is for the resulting nationally significant infrastructure to have a useful life of at least 50 years. This ensures that the infrastructure project will benefit more than one generation of citizens.
To be clear, the useful life of an infrastructure is not necessarily the same as its physical life. The physical life can be shorter, if we expect that the infrastructure may no longer serve its intended function sometime in the future, for example, if it is likely to be rendered obsolete by technological advances after a period of time.
We will use the useful life of the infrastructure to determine the depreciation period of the capitalised assets. This is fair as it ensures that depreciation costs are spread only across generations who will benefit from the infrastructure.
Lastly, all nationally significant infrastructure financed by borrowings must be legally owned by the Government. This ensures that the qualifying infrastructure assets can be capitalised on the Government's accounts.
In addition, the asset must be controlled either by the Government or another entity on behalf of the Government. This ensures that the Government retains ultimate oversight over the infrastructure assets, to incentivise proper upkeep and maintenance, so generations of Singaporeans can benefit.
To give an example, the North-South Corridor will qualify under SINGA, because it is an asset owned by the Government and is controlled by another entity, namely LTA, on behalf of the Government.
The four qualifying requirements that I have touched on set out the projects that can qualify as nationally significant infrastructure. In addition, the Bill sets out limits to ensure that the amount the Government borrow is equitable and sustainable. This is to ensure that future generations are not saddled with a high debt burden.
Clause 5 imposes two restrictions: a gross borrowing limit and an annual effective interest cost threshold.
Together, these restrictions ensure that future Governments will be able to afford the principal and interest costs, while having sufficient fiscal space to fund their priorities of the day.
The gross borrowing limit is set at $90 billion under the Bill. This sum reflects the projected pipeline of nationally significant infrastructure over the next 15 years, after adjusting for inflation.
Ninety billion dollars is approximately 20% of today's annual GDP at current market prices. This is lower than the borrowing limits of Development Loan Acts which previously allowed the Government to borrow for development expenditure in the 1960s to 1980s. Previous borrowing limits averaged 40% of GDP in the year the Acts were introduced. It is thus a reasonable figure given our more mature economy.
I should emphasise that the borrowing limit is a gross limit and not a rolling limit. Once the Government has raised a borrowing under SINGA, that amount will be counted towards the total borrowing limit, even after the loan has been repaid.
After the $90 billion limit is reached, the Government will have to amend the borrowing limit by passing a new Bill in Parliament in order to borrow further sums under SINGA. In doing so, it will need to justify such further borrowings to finance infrastructure projects that are of national importance.
In other words, this Bill that we are legislating is limited to enable the Government of the day to borrow to meet the significant infrastructure needs in the coming years up to a maximum of $90 billion, as we undertake this generational upgrade.
If there are further needs beyond the $90 billion, future terms of Parliament will have to debate and approve further measures to meet these needs.
As set out in clause 5(2), refinanced borrowings will not count towards this $90 billion limit. This is because there is no corresponding spending on and capitalisation of nationally significant infrastructure. Allowing for refinancing, gives the Government of-the-day the flexibility to manage borrowing costs efficiently across interest rate cycles. For instance, the Government may issue bonds across a range of tenors and refinance when the bonds mature.
Hence, the Bill provides for borrowings for the purpose of refinancing, even after the $90 billion borrowing limit is reached.
The second restriction is an effective interest cost threshold of $5 billion per annum. Five billion dollars interest against the $90 billion cap works out to be an effective interest rate of about 5.5%. This threshold ensures we limit our borrowings when interest rates are very high, as interest costs will have to be borne by future generations.
The annual effective interest cost will be calculated based on the effective interest costs paid in the preceding financial year. If the effective interest paid exceeds $5 billon, the Government will not be allowed to borrow more in the next financial year.
Allow me to illustrate how the threshold will work. The recent 30-year SGS that was auctioned in January 2021 had a cut-off yield of 1.4%. If we borrow the full $90 billion based on this rate, the annual interest costs will be $1.3 billion, which is below the $5 billion threshold. But we cannot expect interest rates to remain at low levels forever. Historically, the longest period where SGS yields remained low did not last for more than two years, and this was in the aftermath of the Global Financial Crisis from 2011 to 2012.
So, interest rates may continue to stay low or may increase in the future and we have to be prepared for that. In fact, the cut-off yield of a 30-year SGS went up to 2.94% in February 2018, which is not too long ago.
We have also examined the interest rate trends for SGS over the past 25 years. Cut-off yields of SGS with tenors of more than 10 years have ranged from a low of 0.93% as recently as July 2020, and to a high of 5.87% in 1998 when global interest rates were higher. The $5 billion threshold thus provides some buffer for us to cater to such scenarios.
We will, however, limit the maximum amount that can be borrowed if interest rates are overly high and the interest cost threshold achieves this objective. For example, if interest rates averaged around 10%, then the interest cost threshold will constrain the amount of borrowings under SINGA to $50 billion, notwithstanding the gross borrowing limit of $90 billion.
Setting the threshold at $5 billion therefore helps us to balance between fiscal sustainability and flexibility to accommodate market fluctuations.
A $5 billion threshold caps the interest costs at around 1% of our GDP in 2020 at current market prices. This is a fiscally sustainable level and would not excessively impinge on future Government's ability to fund other priorities of the day. It also provides a buffer to account for interest rates rising and falling through the cycle, as the Government borrows at different points in time to finance infrastructure as and when we need to build them. Let me elaborate.
The cost of borrowing is fixed at the prevailing yield during each bond issuance. As the Government issues bonds over several years, it will lock in interest rates at different points in the interest rate cycle. This means that even if some borrowings needed to be made during periods of high interest rates, there would have been borrowings that were made, or will be made, during periods of low interest rates, so the costs of borrowing will be averaged out over time. Further, the $5 billion threshold translates to borrowing cost of 5.5%, for $90 billion borrowing, which is high relative to historical borrowing rates. The last time when 10-year borrowing costs exceeded this level was in 1998.
With all its fiscal expenditure, the Government will be transparent in reporting the use of borrowings to finance nationally significant infrastructure. When borrowings are used to meet progress payments for nationally significant infrastructure, such spending will be reported in the annual Budget Statement and the Government Financial Statements (GFS), together with annual depreciation expenses and interest costs. Additionally, we will submit a statement of assets financed under SINGA to the President annually to ensure accountability.
Sir, let me now explain how this Bill will impact our Current Reserves and annual Budget balance.
Presently, the development costs of infrastructure are financed using revenues accruing to the Current Reserves and fully expensed upfront in the annual Budget. In other words, Government's annual Budget balance is reduced by the full development costs of any infrastructure that is paid in that year.
With borrowing, the Government will be able to raise cash to meet the outlays for these major, long-term infrastructure projects. But borrowing is not revenue and does not increase the Current Reserves that we can allocate in the annual Budget. This is why the Bill also provides for the capitalisation of infrastructure projects that are financed under SINGA. In other words, the development cost of major, long-term infrastructure will be financed using borrowings raised under SINGA, capitalised as assets and depreciated over the useful life of the infrastructure. Depreciation of SINGA assets, as well as borrowing costs, will be expensed against the annual Budget balance and will reduce Current Reserves of each term of Government over the assets' useful life.
As such, development expenditure financed by SINGA will affect the Current Reserves differently, compared to regular development expenditure. The Budget presentation will reflect this treatment. This better matches the timing of benefits with the timing of spending. Present and future generations of Singaporeans will both contribute to and benefit from such infrastructure. Put together, this approach will smoothen the upcoming hump in development expenditure and lower our average development expenditure over the next decade from around 5% of GDP to 4.2% of GDP, after taking into account depreciation and borrowing costs.
Let me explain using an example. Assume an MRT line that costs $14 billion and has a useful life of 70 years. Currently, we would expense the full $14 billion upfront, which reduce our annual Budget balance by the full $14 billion over the construction period, which may be over a period of say, 10 years. Assuming equal progress in every year, this would mean expenditure of $1.4 billion per year.
Under SINGA, the $1.4 billion cash payment for each year will still form part of the development estimates in our annual Budget, which are subject to Parliament's approval and President's assent. However, we will add back this $1.4 billion in computing our annual Budget balance as this $1.4 billion will be capitalised as an asset.
Upon completion of the construction, we will spread the total development costs of $14 billion over the MRT line's useful life of 70 years, by expensing annual depreciation costs of about $200 million instead. This means that our annual Budget balance will be reduced by $200 million over 70 years, before borrowing costs.
Clause 29 of the Bill will amend the Financial Procedure Act to allow for nationally significant infrastructure financed by borrowings to be capitalised as assets and depreciated over the useful life of the infrastructure.
The Reserves Protection Framework will continue to apply as well. If the Government runs a deficit, including depreciation and borrowing cost of SINGA assets, and do not have sufficient Current Reserves, there will be a draw on Past Reserves. Each term of Government will need to run a balanced Budget over its term, maintaining the fiscal discipline to ensure that we do not spend beyond our means. This fundamental principle remains unchanged with SINGA.
We had sought the President's in-principle support in February this year for the Government to borrow for and capitalise nationally significant infrastructure under SINGA. And as with the case for all Bills to become law, we will also seek the President's assent to this Bill. Under Article 144 of our Constitution, the President has the discretion to withhold assent to any Bill providing for the borrowing of money by the Government, if she is of the opinion that the Bill is likely to draw on Past Reserves. Only after Parliament has passed and the President assented to the Bill, will the Government be able to borrow for nationally significant infrastructure, up to a gross limit of $90 billion.
Mr Deputy Speaker, Sir, I would like to make it clear that this Bill introduces a new form of Government borrowing to finance spending on nationally significant infrastructure.
This is distinct from existing borrowings under the Local Treasury Bills Act or LTBA and Government Securities Act or GSA, which are for specific non-spending purposes, such as for market development, meeting the investment needs of CPF and liquidity. All borrowing under the LTBA and GSA are invested and cannot be spent. Even if we were to borrow up to the $90 billion limit under SINGA to finance nationally significant infrastructure, the majority of our borrowings will continue to be under the LTBA and GSA, which are for non-spending purposes. Some commentators have incorrectly interpreted our high gross debt-to-GDP ratio as a sign of fiscal imprudence, when in fact, our assets are well in excess of our liabilities.
To address these misperceptions, we intend to clearly delineate the two types of borrowing in legislation. First, borrowings to finance spending on nationally significant infrastructure under the SINGA; and two, borrowings which are invested and cannot be spent under the LTBA and GSA. We intend to merge the LTBA and GSA into a single Act, as both are for non-spending purposes. The merger Bill will be tabled in Parliament in the coming months.
In addition, this Bill repeals the Development Loan Acts (DLAs) which previously allowed the Government to borrow for development expenditure in the 1960s to 1980s. This makes it clear that borrowing for developmental purposes going forward, can only take place under the new safeguards that are imposed under SINGA.
Mr Deputy Speaker, Sir, let me now conclude.
In 1965, shortly after Singapore became an independent nation, Mr Lee Kuan Yew said, and I quote, "Over 100 years ago, this was a mudflat, swamp. Today, this is a modern city. Ten years from now, this will be a metropolis. Never fear". Since Independence, infrastructure has played a major role in Singapore's remarkable physical transformation from mudflat to metropolis.
We built a world-class airport that has made us the open, globally connected city we are today. We created our first reservoir in the city and the largest reservoir in Singapore, the Marina Reservoir, by building a dam to keep out seawater. This innovative method provides us with an additional source of water supply and helps alleviate flooding in low-lying areas of the city.
The Downtown Line, which opened in end 2015, reaches out to residential areas such as Bukit Panjang, MacPherson and Bedok Reservoir that were previously not served by the MRT, cutting travel times for Singaporeans living in these areas and connecting people to the city centre.
Moving forward, infrastructure will remain important as our country enters into its next phase of development. We will turn our metropolis into a green, global city that is robust in addressing future challenges. We are building a sewerage system that helps us recycle every drop of water in a never-ending loop. We will bring green and efficient transport options closer to more Singaporeans. We will build coastal protection infrastructure to protect our coasts from rising sea levels caused by climate change.
And in so doing, we will build a Singapore where we and our children can live our best lives in a safe, green and liveable environment, for all time and seasons to come.
This Bill will allow the Government to borrow so that we can make bold and necessary infrastructure investments that are critical to Singapore's long-term development – just as our forefathers did.
It provides an additional fiscal tool to continue to build Singapore for the future. It adheres to our prudent fiscal approach by ensuring that we do not risk borrowing beyond our means.
After all, all debt has to be paid for. If we do not borrow responsibly and sustainably, we would risk being unable to meet our debt obligations. This would jeopardise our credit rating as well as investor confidence and this will hurt us and our children in the future.
This Bill ensures that we borrow to spend only on nationally significant infrastructure investments which will benefit many generations of Singaporeans to come – in line with our values of taking a long-term view and staying prudent and responsible.
We are not borrowing to spend on expenditures that will be consumed quickly. Current generations should continue to pay for their own recurrent needs like healthcare expenditure through recurrent revenues such as taxes. This is the right and responsible thing to do.
Let us share the effort to build our nation together. Most importantly, let us never stop thinking about our future.
In the long journey of nation-building, each generation of Singaporeans are relay runners. Let us always take good care of what we have inherited, run our best race and pass on a better Singapore to those who come after us.
This Significant Infrastructure Government Loan Bill is but one step in this long journey. It seeks to do right by Singaporeans, both present and future, through the financial plans and provisions that we make today. Sir, I beg to move.
Question proposed.
Mr Liang Eng Hwa.
Mr Deputy Speaker, Sir, I will speak on two aspects related to this Bill: firstly, on fiscal prudence and financial discipline, whether that has been undermined with the SINGA Bill; and secondly, on intergenerational equity, a somewhat new perspective that increasingly deserves our attention.
I will also briefly touch on the other tactical considerations with regards to the Government's long-term borrowing strategy, namely interest rate levels and credit costs, servicing and repayments of the Government's borrowings as well as the development of the Singapore debt capital market.
First, on fiscal prudence and financial discipline. Since Independence, the overarching guiding values of our fiscal management have been to spend within our means and to maintain a balanced Budget. We saved whenever we could for rainy days and refrained from borrowing to pay for our expenditures. Whenever we had surpluses at the end of the term of government, we would either redistribute or endow it for specific uses such as the Pioneer Generation Fund, the Rail Infrastructure Fund, the Special Employment Credit Fund and so on. Otherwise, we would convert the surpluses to reserves so as to grow the base, to invest and to a generate larger returns contribution in the future.
These values of prudence and discipline are also enshrined in our Constitution.
The Government of the day must balance the Budget during the term of government. The President holds the second key in the use of reserves and only up to 50% of the NIRC can be used to fund the current annual Budget spending. There are also gross borrowing caps set by the Parliament on the issuance of Government debt securities where the proceeds can only be used for investments.
Besides these institutional safeguards, it is also vital to have alignment at the political stewardship level. We are fortunate to have successive Ministers for Finance who are committed to the values of prudence and discipline. Some would say that our Ministers for Finance tended to be conservative in managing the Budget. Well, they should be. For a small island state like Singapore, a higher safety buffer is always wise and will always serve us well. We must always expect a major storm around the corner that could hit us and when it does, we can take comfort that we have the resources to decisively tackle and overcome the crisis.
Our prudent and disciplined management over the years has allowed Singapore to build a strong balance sheet with net zero debt and attain the highest international sovereign ratings of AAA by global rating agencies. As a result, whenever the Government taps the debt market, it is able to borrow at a risk-free rate or at zero credit costs. This opens another avenue of inexpensive funding for the Government.
Sir, the basic question then is whether this differentiated financing strategy where we can now borrow over a long term to fund large-scale capital expenditures signals an increasingly less prudent management of our finances?
In all fairness, the Government did borrow in the 1970s and 1980s to pay for the construction of Changi Airport and our MRT lines. However, since the 1990s, we have used the annual budget and the accumulated surpluses to pay for major infrastructure projects.
Under this SINGA framework, lumpy infrastructure costs greater than $4 billion can be financed using long-term debt.
I have been pondering this topic since it was first raised in 2018; should we be concerned with this new approach and where it could lead us to? Will these borrowings burden our future generations with high interest costs and large bullet repayments? Or is it indeed timely to now be open to long-term debt financing so that we can achieve the optimal outcome for Singapore given the current circumstance?
Let us first look at the realities before us.
First reality: we do have significant infrastructure expenditures in the immediate future and these are not small spending items. Projects like the Cross Island Line, Jurong Rail Line as well as the Deep Tunnel Sewerage System are not only super big-ticket outlays, their constructions may stretch more than a decade with benefits accruing across generations.
Second reality: even if we were not in the midst of the COVID-19 crisis, financing such huge expenditures using current revenue or accumulated surpluses would still pose a significant strain to the annual Budget allocation.
Our recurrent expenditures are already growing each year while our revenue outlook looks increasingly uncertain. The massive pandemic-related relief spending has also exacerbated the strain on our books. To fund such mega long-term projects under current Budget cycles, we may have to either cut other spending or raise tax revenues – neither of which are suitable under the current environment.
So, we are indeed facing a situation of tighter fiscal headroom going forward. Should we delay these critical projects because of current budget constraints? Well, these infrastructures are necessary to enhance our capabilities and to improve our quality of life. We should get these projects going soonest.
Should we then just draw on our reserves to pay for these projects? If this is indeed the instinctive mindset, then we would really be going down a slippery slope. We should not see the reserves as an ATM to be drawn on whenever we need money. Reserves should only be used as a last resort such as during a devastating crisis like the one we are in today. They are our last line of defence and we really want a solid defence.
Each draw on our reserves also means divesting a part of our financial investments and so we will lose out on the returns from these investments and their contribution to NIRC.
Given these considerations and the current budgetary constraints, I would agree that the next best option would be to borrow for such expenditures – but with strict conditions.
I note the list of qualifying criteria to borrow under SINGA such as the minimal useful life of 50 years and that the projects should support national productivity and achieve economic, environmental and social sustainability goals.
Similar to the Government Securities Act (GSA) and the Local Treasury Bills Act (LTBA), we need to also hardcode the necessary prudential safeguards so that borrowings are indeed selective and controlled. The overall gross borrowing limit of $90 billion ensures that the Government will not run into an excessive debt situation and that we will have the ability to service and repay the debt.
It is also important to impose an annual interest threshold to avoid overly onerous financing costs on future generations, although, in my view, the $5 billion threshold in the Bill appears to be on the high side. And the reason is because besides the interest cost, there is also the depreciation charge. Under the SINGA framework, we need to capitalise the expenditure and these items – both the interest cost as well as the depreciation charge – will henceforth be an additional recurring expense item in our annual Budget. This is a significantly large expense item and will make the overall balancing of the Budget more challenging going forward.
Hence, this option of tapping the debt market to finance very large infrastructure projects can only be palatable if interest rates and costs remain low.
Indeed, interest rates are at historical lows today, presenting an opportune window for the Government to seek funding. It also makes good sense to take advantage of our very solid credit ratings to enjoy zero credit cost borrowing in the market. From a capital market development standpoint, having such a high quality issuance will also deepen our bond market and attract a bigger pool of institutional investors to Singapore.
Sir, we are far from those countries with high public debt-to-GDP ratio, which transfers heavy tax burden of today onto future generations. This brings me to the next point on intergeneration equity.
Perhaps the more enduring argument as to why we should introduce the SINGA Bill is that it helps better manage intergenerational equity when we fund very large and very long-term infrastructural projects.
During the early years of Independence, where survivability as a nation was our foremost concern, our pioneering generations saw the need to tightened belts and save for a better tomorrow. The savings built up provided security and benefited subsequent generations who also saw as their obligation to build on past savings so as to provide a better and more secured life for the next generation.
The is the self-sacrificing spirit of the Pioneer Generation as well as Merdeka Generation. They supported the Government's prudent fiscal policy and worked hand in hand with the Government to grow the reserves and strengthen our fiscal foundation.
As we built up our nest eggs over the decades, the Government would regularly share and distribute the fruits of our past successes. At the same time, we also accumulated where we could so as to provide for higher spending needs in the future.
In 2009, the Government tweaked the reserves framework and also introduced the NIRC as another contribution to the budget to help pay for our growing current expenditures. In a way, the 50-50 sharing of the NIR represents an intergenerational balance that we want to achieve between current and future generations.
In 2015 and 2018, to thank our Pioneer and Merdeka Generations for their sacrifices, the Government set aside a total of $15 billion from the accumulated surplus or current reserves to set up the Pioneer Generation Package (PGP) and Merdeka Generation Package (MGP) to provide healthcare support for our seniors. The Government also increased the share of Budget spending in senior facilities and major healthcare infrastructures, amongst others, to care for this generation of seniors.
On the other hand, in order not to pass the buck of current spending to future generations, we strive to use current revenue to pay for these recurring expenditures, thereby ensuring sound and sustainable operating finances.
The financing of our large-scale long-term infrastructure with long-term borrowing is a further manifestation of that spirit of equity. As this infrastructure benefits multiple generations, it is more equitable to share the costs across generations by way of a long-term financing structure.
Although I support the Government's greater emphasis on intergeneration equity in our fiscal management, we know it is always difficult to find that balance that everyone agrees with. So, while we can depend on frameworks like SINGA and NIRC to seek better equity, we should never discard our long-held values and ethos of always leaving something behind for our next generation and to strengthen our future. Sir, in Mandarin, please.
(In Mandarin): [Please refer to Vernacular Speech.] Mr Deputy Speaker, Sir, the SINGA Bill introduces a very important topic on intergenerational equity, that is, how to distribute fiscal resources and burdens in a more balanced way between generations?
In the past, our Pioneers scrimped and saved so that future generations can have a better and more stable life, as well as more financial resources to rely on during rainy days. It was the spirit and values of the Pioneer Generation to be thrift and to toil before enjoying. Because of their sacrifices, Singaporeans today enjoy sizeable reserves. It is exactly because of our reserves that we can have the resources and confidence to fight the current COVID-19 crisis.
As the economy matures and demography changes, our fiscal policies and practices must change accordingly, especially in terms of the intergenerational distribution of financial resources and fiscal burdens.
Let me give two examples.
First, of course, we want to strengthen our financial foundation. We should not change this principle and practice. But when each term of Government ponders upon what to do with the Budget surpluses and NIR, the idea of intergenerational distribution of fiscal resources should be considered.
Over the years, as our fiscal position improves, we have been able to allow this generation of Singaporeans, including our Pioneers, to enjoy the fruits of economic growth and improve their lives. That is why we introduced the Pioneer Generation Package and the Merdeka Generation Package and allocated more funds in each Budget to build more healthcare facilities to better look after the seniors.
With regard to NIR, we amended the Constitution in 2009 to allow 50% of the NIR to be used to fund the current annual Budget spending, to help balance each year's Budget. The other half of the NIR must be reinvested in our reserves so that it can continue to grow. We can then continue to have more returns to be injected into each year’s fiscal revenues to cope with the fast-growing expenditures of the future.
I think this is an acceptable and balanced intergenerational approach. As the saying goes, "50-50, feelings will not be dissipated". This will promote intergenerational harmony and allow each generation of Singaporeans to enjoy the fruits of our success
Second, we also need to ensure that there is a balance between recurrent expenditures and revenues for each term, and that there is no deficit, so that we can sustain it for the long term. For each generation of Singaporeans, the recurrent expenditures must be borne by the current generation and not through loans and other forms to spend the revenues of the future. They should not pass the fiscal burden to the future generations.
This is being responsible and is in line with the principle of equity.
Now that the Government is introducing this new Bill, I think this is a good opportunity to adjust the intergenerational distribution of fiscal resources within an appropriate scope.
In the past, we used our current Budget surplus to fund lumpy, large-scale projects. That is to say that, we are using the current generation's money to pay for infrastructures that will benefit future generations. But we know that as the economy matures and the population ages, our expenses will continue to increase, and our Budget will tighten. Worse still, with the pandemic and not knowing how long it will last, our overall fiscal outlays and revenues will definitely be subjected to greater pressure. If we continue to use the annual Budget surplus to pay for these mega infrastructure projects, we will have to face the choice between reducing expenditures in other areas or tax hikes. Both options, given the current economic situation, are not palatable.
With this new Bill, we can fund lumpy, long-term infrastructure projects by issuing long-term debts. This is the next best thing at this stage. I would like to give two reasons to support it.
First, the long-term interest is at a historic low so we can use this window of opportunity to reduce the borrowing cost to the lowest.
Second, by issuing long-term debt, we can achieve intergeneration equity by spreading the burden to future generations as well.
Projects like the Cross Island Line, Jurong Rail Line as well as the Deep Tunnel Sewerage System are all long-term, cross-generation endeavours which will benefit many generation onwards. Through long-term loans, we can more appropriately spread the burden across several generations. This is fair and can also avoid major budgetary fluctuations from year-to-year. Of course, we have the duty to ensure that we do not leave a huge debt to our future generations.
This Bill has also set certain key principles that we must abide by, such as the $90 billion borrowing limit and the $5 billion annual interest payment threshold. These two ceilings will help ensure that Government will not have too much debts and that it will have the ability to repay.
I believe this Bill will give the Government another fiscal management tool, so that the Government can respond more nimbly amidst the current uncertainties and have more policy space to address the issue of intergeneration equity.
(In English): Sir, I have two further clarifications.
First, during the debate on the 2021 Budget Statement earlier this year, I had suggested that if the fiscal condition remains tight, the Government could consider special purpose borrowing to finance time-critical and worthy investments to avoid having to divest our financial investments in the past reserves.
In his round-up speech, the Deputy Prime Minister replied that the Government would study the possibility of a one-off, special purpose borrowing to finance economic investments to help Singapore emerge stronger from COVID-19. So, can I clarify whether the Government envisages that the considerations behind such one-off borrowings would be different from those of SINGA?
My own thinking is that, when I made the suggestion during the Budget debate, it should be different. SINGA is meant to finance major, long-term infrastructure benefiting multiple generations.
I would suggest that the one-off special purpose borrowing be to finance economic investments to emerge stronger and should only be done in the context of the exceptional circumstances presented by COVID-19. For example, we may need to invest in capabilities that take advantage of the new opportunities in the global economy arising out of COVID-19. So, if our revenues are insufficient to fund these investments due to the economic situation being subdued, then we can deploy such special purpose borrowings. And such special purpose borrowings can also be distinguished from the normal borrowing in that it is one-off, it has a clear nexus with strategies for post-COVID-19 recovery and investment and also help us keep our assets invested. Could the Deputy Prime Minister provide an update on this?
My second clarification is, as mentioned in my speech, one of the most invaluable international accolades that we received is —
Excuse me, Mr Liang, you have to wrap up quite shortly, please.
— our AAA rating by all three major global rating agencies. I believe we are amongst the remaining nine countries in world left that continue to enjoy this highest rating. So, being a AAA-rated sovereign enables us to borrow from the international market at a risk-free rate. It also has implications on the borrowing cost of Singapore corporates, as bonds issued by corporates/companies are often benchmarked to the Singapore Government yield curve.
So, can I ask the Deputy Prime Minister if our AAA rating status could be affected with this SINGA Bill and how have the rating agencies and international market responded to this new move? Sir, I support the Bill.
Ms Foo Mee Har.
Mr Deputy Speaker, the proposed Significant Infrastructure Government Loan Bill, SINGA, represents a significant shift in the Government's position on borrowings for the purpose of Government spending. I support the Bill.
It is coming at a time when the country is facing another hump in its development spending needs, with plans for new rail lines, water and sewerage infrastructure as well as coastal protection measures against rising sea levels. These important projects come amidst a tighter fiscal situation, exacerbated by the COVID-19 pandemic. The proposed SINGA will enable the Government to continue investing in nationally significant infrastructure which incur heavy upfront costs but provide long-term benefits.
With the low interest rate environment and Singapore's AAA credit rating, the borrowing cost associated with SINGA is expected to be low. SINGA will make related amendments to the Financial Procedure Act to provide for capitalisation of the expenditures of these nationally significant infrastructure over the long term. This is in contrast to the current approach of fully expensing off upfront in the annual Budget of the Government.
Sir, the ability to capitalise expenditure under SINGA will enable lumpy upfront costs to be spread out across current and future generations who will enjoy these benefits. It will help free up cash for other needs, lessen pressure for tax increases and trade-offs on competing important investments.
Sir, I have three questions for the Minister to clarify relating to capitalisation.
One, for the Minister to provide details on how far out capitalisation of projects under SINGA will be allowed. Two, quantify the fiscal space created from this new accounting treatment. Three, estimate the amount of taxes that would have had to be raised to fund such long-term expenditures, if these were made under the current annual expense approach.
Sir, even as I support this Bill, we must exercise utmost discipline in what we borrow for and the extent of our borrowing. I would like to call out the need to guard against going down the slippery slope of other countries, where public debt has been accumulated to higher than that of their GDP, thereby transferring immense tax burdens from today onto future generations.
High levels of Government debt can have adverse effects on the economy, including crowding out of private sector investment, creating the expectation of future tax increases and injecting overall uncertainty into the economy.
It is critical that SINGA does not represent a material shift from the Government's long-held policy stance of maintaining fiscal prudence. We must ensure that our net asset position remains strong to absorb the borrowings under SINGA. The debt we accumulate must not put unfair pressure on future generations.
So, to avoid the temptation of a "spend, spend, spend" mentality that access to "easy" money can engender, it is critical that the Government puts in place the necessary safeguards. It is important that we establish a set of robust parameters at the starting line now. Borrowings must be carefully calibrated and we must draw a red line that should never be crossed.
Mr Deputy Speaker, I am, therefore, comforted that clear provisions are provided in the Bill to separate major infrastructure from routine infrastructure and recurrent spending. Projects under SINGA need to be at least $4 billion, with the infrastructure available for use for at least 50 years, owned by the Government and important to national interests.
I call on the Government to put in place a SINGA Evaluation Panel, to include independent expert panels, to ensure all projects funded under SINGA are highly selective, robustly assessed against the qualifying criteria provided under the Bill. There should also be cost-benefit analyses to justify the expenditure.
It is important that our borrowings are sustainable and prudent. The Bill includes safeguards that cap the overall gross borrowing at $90 billion. However, Statutory Boards such as HDB, LTA and PUB have also issued bonds on financial markets to finance infrastructure projects. How do we ensure that cumulative bond issuance, whether for SINGA or non-SINGA projects, by all Government agencies as well as contingent liabilities, remain within an acceptable range? Borrowings under SINGA are capped at $90 billion, about 20% of GDP. I would like to ask the Minister, if this limit will be adjusted as GDP grows? How will the Government ensure Singapore's AAA credit rating be preserved amidst increase borrowings?
Sir, the Bill provides for an annual interest threshold of $5 billion to avoid imposing burdensome financial costs on future generations. Nevertheless, the potential interest costs of $5 billion on our annual Budget is still very significant. To put things into perspective, the impending GST hike of two percentage points is expected to raise $3 billion in revenue, but GST would have to be raised 3.3% to cover interest costs of $5 billion. This does not include the additional revenue needed to also fund annual depreciation of the capital expenditure borrowed under SINGA.
Of course, having said this, given the current low interest rate environment in the foreseeable future, I do agree with hon Member Liang Eng Hwa that it makes sense to tap the debt market now but we must remember interest rate can rise. So, this Bill does provide some buffer for interest rate cycles' yields and the potential for issuances of longer tenure bonds.
Mr Deputy Speaker, the Government's intention to issue green bonds under SINGA is a great move. For a start, up to $19 billion in public sector green projects have been identified to be financed by green bonds, including the waste and water treatment facility at Tuas Nexus.
SINGA has the potential to catalyse the flow of capital towards sustainable development, not just in Singapore, but in Asia. I have seen a strong momentum amongst investors around the world towards environmental, social and governance (ESG) causes, with increasing numbers of asset owners making commitments to prioritise sustainability and investing for good in their investment portfolio. The green bonds under SINGA are, therefore, likely to be well supported by market demand, attract more favourable pricing and have potential to deepen market liquidity for green bonds.
Last but not least, I would like to end by seeking a number of clarifications from the Minister in relation to the assets under SINGA.
With the expectation that the infrastructure should be available for use for least 50 years, does the $90 billion limit take into account upgrading and maintenance cost over the lifespan of the infrastructure? If not, where in the Budget does it provide for this cost?
Two, if interest rates rise and the cost of debt servicing hits the threshold, does the Government have the right to divest the Government-owned assets in part or fully to keep within the interest rate threshold?
The Government can raise money outside of Singapore and in a currency other than the Singapore dollars. How does the Government intend to manage the foreign exchange risk related to this borrowing?
Assoc Prof Jamus Lim.
Mr Deputy Speaker, during the Budget 2021 and subsequent Committee of Supply debates, I suggested that our notion of infrastructure should not be limited to traditional understandings of physical structures and facilities. I explained how if we wish to be a leader in the modern knowledge-driven economy of the future, we can and should direct our development expenditures ever more towards investments that are essentially weightless in nature and scale back on the lumbering, massive capital projects of yesteryear.
Today, I wish to flesh out these arguments in greater detail. I will explain how investments in human capital are not only distinct from investments in labour, but also more akin to our usual definitions of infrastructure. I will also share how returns to human capital often significantly exceed those of hard infrastructure even as we are looking purely at the boost to macro-economic growth. I then offer a simple checklist of how we can distinguish between human capital investments from recurring expenditures.
For starters, allow me again to applaud the Ministry for its willingness to relax its traditional reticence towards borrowing, to recognise that this really is an opportune time to exploit historically low interest rates to finance important, long-term investment opportunities. I sincerely believe that there is a pearl of wisdom in this oyster of insight.
I do have a number of concerns specific to the Bill itself.
My first concern has to do with both the total borrowing limits of $90 billion, as well as the interest threshold amount of $5 billion stated in clause 5 of the Bill. Well, I understand that it is ultimately necessary to impose specific thresholds. I think it is worth asking how these values were arrived at. I also wonder why the interest threshold of $5 billion was chosen which would imply an interest rate of 5.6%, as Minister Heng alluded to. Because this strikes me as rather high given the current interest rate environment. And since rates are locked in at the time of issuance, it also raises the hurdle rate for infrastructure investments that may be considered.
Second, I note that clause 5 of the Bill also allows for monies to be raised in foreign currency, as Member Foo Mee Har has mentioned. This suggests that if our inherent liabilities are long-term and denominated in Singapore dollars, this exposure if undertaken in foreign currency subjects the debt to a non-trivial amount of currency risk. What mitigation mechanisms does the Ministry or MAS plan to deploy to limit such risks?
Third, clause 11(2) of the Bill defines nationally significant infrastructure to be one that has a useful life of at least 50 years upon completion of the project. Again, while I appreciate that a duration for what constitutes significant will ultimately have to be chosen, I would note that many existing infrastructure projects would not have qualified under this rather long timespan.
The Tanjong Pagar Container Terminal, for instance, began operations in 1972 and moved to Pasir Panjang in 2017, amounting to 46 years. The Brani Terminal dates back to 1992 and is set to be decommissioned in 2027, by which it will have operated for 36 years. Kallang Airport lasted for 19 years and Paya Lebar Air Base, while it operated as Singapore International Airport, lasted 28 years.
A lower useful life threshold of say, 35 years, strikes me as more reasonable.
Finally, I will add that clause 11(4) requires that the qualifying capital expenditure for every project participant must amount to at least $4 billion. For public-private partnership projects, then, this would either rule out those where the Government is either unable to secure sufficient private sector buy-in which may in or of itself be a signal of the project's potential viability, or when buy-in is sufficiently large, it would preclude the Government from being able to take a minority stake. I understand that this is the purpose. But nevertheless, it should be clear what our trade-offs are.
Having said all that, what is infrastructure? The Oxford English Dictionary defines it as the basic systems and facilities needed for the operation of a society or enterprise. Such systems and facilities could and typically do refer to roads, bridges, power ports or what I will refer to as hard infrastructure. Roads get us to work, power keeps us working in ports, allows us to sell the fruits of our work to markets, far and wide. There is no dispute that when designed and implemented well, hard infrastructure accumulated over the span of many years or decades can yield valuable payoffs to an economy and society, and, hence, is an endeavour worthy of Government investment.
But it is not difficult to conceive of other systems that are critical for the successful functioning of any modern economy. We sit in the House operating under the auspices of a particularly successful realisation of the Westminster system of government, without which our contracts might not be honoured, our policies not delivered or our peace not guaranteed. Our healthcare system has kept us safe from the ravages of COVID-19 and our educational system has allowed our emergence, in the words of Founding Father Lee Kuan Yew "from Third World to First". These latter two aspects – health and education – and arguably constitute systems that enable the operation of not just our, but any 21st century economy. We often refer to the accumulation of knowledge and wellness which makes us productive as human capital, and the systems that deliver human capital are essentially soft infrastructure.
Mr Deputy Speaker, I am not alone in insisting that infrastructure can be more broadly and meaningfully defined. The recently announced American jobs plan, while billed as a US$2 trillion infrastructure stimulus, nevertheless, construes a much wider scope for what constitutes infrastructure, including the soft infrastructure components I am suggesting here.
If one is willing to apply a charitable interpretation, clause 2 of the Bill actually already allows for SINGA to encompass soft infrastructure. Part B(7) states that investments are to support or materially improve productivity and Part C requires that they benefit present and future generations of Singaporeans.
Human capital investments are entirely consistent with both of these sub-clauses. The only limitation being that it constrains infrastructure to any structure or building, whereas I would instead allow for structure, building or projects instead.
The standard concern that this Government has historically raised is that we should not be financing routine spending – payment of our education and healthcare professionals or funding allocated to subsidise such efforts – with long-term borrowing. But these are only recurring expenditures when viewed from the perspective of the service delivery providers. In this sense, paying our teachers, our trainers, our doctors and nurses, our scientists and researchers are certainly a variable cost. But when viewed from the perspective of the recipients – our students, our temporarily sick, our potential inventors – we can see how we are ultimately vesting value into the future. Moreover, we already systematically embed development expenditures, which by definition are deigned to be long lasting, into our annual fiscal Budgets, a recognition that what is spent on a year-to-year basis cannot be easily disentangled from multi-year projects.
By the same token, funds devoted to soft infrastructure can and should be regarded as non-recurrent development financing, especially when returns are expected to accrue over the very long run. My Sengkang colleague, Louis Chua, will elaborate on why this distinction between development expenditures and long-term assets may well turn out to be an artificial construct.
Another objection to Government's investment in human capital or soft infrastructure more generally is that being embedded in private individuals, investing the greatest benefits to them directly, could mean that it is difficult to justify paying for skill and experience acquisition out of the public purse. However, there are means by which such private returns may be recovered. One approach is to offer scholarships that are contingent on incomes finally earned. I will return to this example in a bit.
When we think about investments, the standard approach is to compare observed returns. This is bread-and-butter work for the professional fund management industry, of which I have been a part. As an asset class, the expected long-term returns from global infrastructure, net of inflation, is only 2.6%. In contrast, the real returns to an additional year of schooling is often in the order of 10.2%, almost 10 times as large.
One could argue, of course, that such returns are private returns and do not capture the contribution of each of these factors in macroeconomic performance. That is fair enough. So, let us go ahead and compare their respective contributions to economic growth. While estimates may differ, one recent study suggests that a 1% increase in infrastructure capital can elevate output by 7% to 10%, not a number to be sniffed at. But the comparable increase in Secondary education alone could induce gains of 10% to 12%. Other credible estimates suggest even higher gains as much as 16%.
Sir, the bottom line is straightforward: whether we focus on public or private returns, investments in soft infrastructure, such as human capital, generally offer a higher payoff compared to hard infrastructure, and my belief is that we should invest more in the type of infrastructure assets that offer a greater bang for the buck.
While a comprehensive checklist for evaluating the merits of any human capital project falls well beyond the scope of this speech, I will sketch out some assessment criteria that I believe are worth considering as to whether a project should be classified as soft infrastructure.
First, as a basic principle, the assessed returns from the project should more than pay for its original outlays. This is a remarkably low hurdle. Schooling projects that permanently raise an individual's income, say, a full-ride scholarship to university, could translate into as much as 70% higher lifetime earnings. Such higher incomes would mean higher tax returns over the course of the person's working life, which could easily pay for the original costs of the scholarship.
Second, most capital projects often impose static criteria, involving cash flow analysis. The most common among these are payback period computations, which is the time needed for the project to return the original investment, in terms of cash flows generated. For hard infrastructure, these may be measured in terms of tolls or user fees; for soft infrastructure, these would be evaluated by enhanced tax revenue. Since changes in taxable incomes are not generally large, we can conceivably entertain payback periods of between 10 and 12 years.
Third, capital projects also allow for dynamic criteria, such as the net present value of a project or its internal rate of return. Such criteria are easily adjusted to accommodate human capital projects. The main adaptation is to substitute the useful working life of a project with the average duration of a working life. In advanced economies, this duration averages 36 years. This itself would exceed the useful life threshold of 35 years that I outlined earlier for hard infrastructure projects.
Finally, as is the case for hard infrastructure, all borrowing should roll in the full amount of the project's expenditure, including interest costs and regardless of whether the disbursement is over time, into the initial borrowing issuance. This protects against unexpected changes in interest rates and the need to roll over borrowing.
What might some examples of soft infrastructure projects, which broadly meet the conditions I set out above, be? In my earlier speeches, I spoke about how we could finance smaller class sizes, even if on a limited basis, for languages and math, or to provide additional funding for teaching aides. This will allow us to avoid closing or merging schools and instead direct SINGA funds towards keeping schools open, albeit with trimmed-down class sizes. Similarly, we could use SINGA to seed an initial insurance risk pool, so as to enable us to roll out redundancy insurance without delay and without drawing down on our reserves.
The Workers' Party manifesto has also suggested raising the target percentage of university graduates per cohort, expanding additional baseline funding for less popular schools and expanding the number of infant care centres, especially in demographically-consistent neighbourhoods. All these examples could conceivably qualify as long-term human capital accumulation projects.
Two more ideas may be considered. First, we could use SINGA to seed a fund for income-contingent scholarships, as I mentioned earlier. The Government pays for all the costs of University or the continuing education programme, perhaps subject to a very modest co-payment as collateral. The recipient would then pay off that acquired debt only in the event that they secure a job, following graduation. Of course, some details, such as the specific major that is allowed to be undertaken, may need to be finessed. But the overall idea strikes me as eminently implementable.
Second, we could direct SINGA funds towards vouchers that would be applied by parents to send their children to both non-KiFAS-eligible pre-schools as well as charter schools, which are schools allowed to develop non-traditional syllabi that de-emphasise academic testing but, nevertheless, set rigorous, assessable markers for inquiry, innovation, imagination and invention. The key difference here is that these schools would be funded indirectly by the vouchers, instead of direct MOE-approved funding. The upshot of such schools is that they may even generate excellent test scores, even if this objective does not feature in their original mandates.
Mr Deputy Speaker, I have, thus far, emphasised all the economic payoffs to investing in soft infrastructure. In closing, allow me to also touch on why the benefits of human capital accumulation go far beyond simply improving the productive capacity of our economy.
A nation rich in human capital is often one that is simultaneously rich in ideas and experiences, happiness and well-being, wisdom and understanding. These contribute far beyond the narrow scope of economics. An educated and informed populace will be engaged, creative participants in our political process, enhancing our democratic credibility. Creative and curious individuals also bring out diversity and novelty to our social environment, enriching our cultural and artistic landscape. Indeed, Gary Becker, the Nobel Prize-winning economist who pioneered much of the early work on human capital, deeply understood the importance of habits, culture and social interactions and the role they played in the long-run success of a nation.
It is in this spirit, extending beyond only dollars and cents, that I am making the case for us to expand our conceptualisation of SINGA infrastructure beyond structures and buildings, to encompass investment in our children, in our people, in the one resource that we truly have as a country. On that note, Mr Deputy Speaker, I offer my support for the Bill.
Order. I propose to take a break now. I suspend the Sitting and will take the Chair at 5.15 pm.
Sitting accordingly suspended
at 4.53 pm until 5.15 pm.
Sitting resumed at 5.15 pm.
[Deputy Speaker (Mr Christopher de Souza) in the Chair]
Debate resumed.
Mr Deputy Speaker, Sir, although the Singapore Government has borrowed from international lenders previously to fund public infrastructure projects, such as the loans it took in the 1980s to build the first MRT lines, this Bill is significant in the scale of borrowing and the types of infrastructure that qualify.
It has been remarked that it is efficient to issue new bonds under the proposed Significant Infrastructure Government Loan Act (SINGA) as it allows the country to benefit from the current low interest rate environment. To place this remark in perspective, it is helpful to recognise that for a small, open economy like Singapore that is well integrated with the international capital market, the interest rate charged on a sovereign loan is roughly speaking the sum of a safe rate of interest such as the interest on the US Treasury Bill and a credit risk.
While the Singapore economy largely takes a safe rate of interest as given, the currently low credit risk is the result of past fiscal prudence. Our capacity in the future to generate tax revenue to meet our future spending needs will be necessary to enable the country to maintain this low credit risk. In other words, the credit risk can move up or down even when the safe interest rate stays constant.
What factors led to the creation of fiscal space in the past and what factors might affect Singapore's credit rating in the future?
Before answering these two questions, it is good to quickly review the justification for SINGA Bill that we are talking about in Parliament.
The purpose of the Act is to enable the Government to borrow and to finance nationally significant infrastructure to support or improve national productivity or Singapore's economic, environmental or social sustainability.
As I read it, there are two dimensions to the infrastructural investment.
The first is public investment, such as in roads and major highways, which serves to raise the productivity of firms. There is evidence that the stock of public capital – highways, roads and so on – complements private capital so that the public capital raises the returns to private business investments. Consequently, workers' productivity is also raised.
The second is infrastructural investment which serves to mitigate the adverse effects of climate change, such as seawalls and dykes. In the absence of this second type of investment, not only would national productivity fall, lives could be at risk with coastal hazards.
Since the benefits derived can be enjoyed by as yet unborn generations, the Government of the day must act on their behalf. They are not around to vote.
It is also justifiable to issue new bonds to finance such infrastructural investments so that future generations can share in bearing the tax burden. This is intergenerational distributive justice.
To the question of what factors led to the currently low credit risk.
No doubt, Singapore's remarkable economic catch-ups since Independence effectively expanded the tax base at given tax rates. With economic growth, real income steadily increased decade after decade. Income inequality was not a serious problem in the first couple of decades after Independence as industrialisation increased the demand for relatively unskilled to semi-skilled workers, thus pulling up their wage earnings.
With a relatively young population then, healthcare spending was a smaller share of the Budget. Thus, the demand for fiscal resources to support social spending was less pressing. Budgetary surpluses added to our national reserves. Unlike unfunded social security systems, a pay-as-you-go system where current taxes on the working young are used to pay for the benefits of retirees, Singapore's fully funded social security system, the Central Provident Fund, also added to national saving.
These factors altogether contributed to Singapore's good credit rating. That was how we achieved our low credit risk.
Looking to the future, what factors might affect Singapore's credit rating?
With health expenditure rising as a share of gross domestic product (GDP) in tandem with an ageing population, having the capacity to raise tax revenue to fund such spending will become important.
The concept of fiscal sustainability is useful as a way to think about how to maintain a low credit risk. The Government Budget at any point in time is fiscally sustainable if the expected present value of primary surpluses, which do not include interest payments, is at least as large as the size of the public debt. Although a country can still run into Budget deficits – when it is hit by a recession, for example – it must ultimately plan to generate tax revenue that is in excess of current spending in other years if it is to be able to service an outstanding stock of public debt.
To use an analogy, suppose that at the start of your career, you take out a loan. Then, although in future periods, you might still occasionally borrow, there must be sufficiently many periods during which you spend less than your income for you to be credit worthy.
In anticipation of increased social spending, in particular on health, with an ageing population, it would be necessary to raise taxes in order to remain fiscally sustainable.
The Government has announced in Budget 2021 that it plans to raise the GST rate from 7% to 9% any time from 2020 to 2025. From the perspective of the analysis just provided, one benefit to the country of raising tax revenue in anticipation of higher social spending is that the credit risk or risk premium can be kept low.
In other words, whatever the safe interest rate is, the borrowing costs incurred to service the loan undertaken in this Act can be kept relatively low by maintaining good credit worthiness.
Returning to the analogy, suppose that in the course of your working life, the interest rate unexpectedly rises. Then, in order for you not to default, you would have to tighten your belt and cut spending unless you discover that your income is also going to increase.
While the safe interest rate is currently low and expected to be low for some time, unexpected events that raise the safe interest rate can affect fiscal sustainability.
Data showed that in the early 1980s – the first half of the decade of the 1980s – the safe interest rate experienced a sharp spike that caused a fiscal crisis in many emerging economies and posed budgetary challenges for some advanced economies as well since the cost of servicing public debt sharply increased.
In order to re-establish fiscal sustainability in the event that the safe interest rate rises, it is necessary to either raise taxes or to cut spending.
Mr Deputy Speaker, Sir, there is indeed justification for the Government to issue new bonds to finance significant infrastructure projects that would raise national productivity or mitigate the adverse effects of climate change. We must maintain the reputation that we have built up over the years for good financial management of our fiscal affairs. In this context, I support the Bill.
Mr Deputy Speaker, Sir, I support the Bill and the parameters set out for major infrastructure projects to be financed by borrowing, especially since these are long-term infrastructure that will benefit future generations. However, I am concerned about how we can do more to guard against burdening our future generations. After all, such borrowing needs to be serviced and repaid.
We need to be mindful as we do not have natural resources for sources of revenue, unlike other nations. Therefore, our manpower capabilities and earning capacity are important. We must be able to weather economic ups and downs and future political and social developments. Such uncertainties could potentially derail projects – just as we are experiencing the disruptions to our construction sector caused by the COVID-19 pandemic.
In other countries, in addition to borrowing money, some governments had resorted to printing money, commercialising public services and levying taxes in order to afford development works.
We are fortunate that Singapore's AAA rating enables us to borrow at favourable interest rates, particularly in the current economic environment. I am confident that using these funds to invest in our infrastructure development will stimulate future economic growth, which will enable us to service and return the borrowed money.
The other options are out of the question. Printing money leads to hyperinflation. Commercialising public services will impose hardship on the lower income groups. How can we levy taxes for infrastructure projects when we are already trying so hard to minimise taxes?
It is possible to partly service the loans through revenue collected from services provided by the infrastructure such as via tolls and fees. A portion of the repayment will come from users of the projects who can be both local and foreign. It would be less of a burden on our future generations if more of the revenue could be generated from foreign or external parties while ensuring that the services provided fulfil all demands without conflict or competition. The Government may still need to step in to render assistance and subsidies for the less privileged users.
Finally, we must consider operational and maintenance costs of infrastructure projects. It remains important that they can be self-sustaining and operationally viable. I support the Bill.
Mr Deputy Speaker, Sir, I support the Significant Infrastructure Government Loan Bill, or SINGA, in short, because it can improve the financial efficiency and fiscal accountability of our public finances. However, the SINGA Bill is no indication that the Government is short of funds for national development.
Today, the total financial assets owned by our country has reached $1.35 trillion by end of March 2020. Despite the drawdown for the five COVID-19 Supplementary Budgets, our total financial assets are probably still growing because large capital inflows should have allowed MAS to accumulate more foreign currency assets in order to keep the Singapore dollar within its policy band.
Even without touching the principal of the reserves, the Net Investment Income of about $40 billion a year from the reserves is enough to fund the infrastructural projects and social spending increases, especially those in the healthcare area, into the foreseeable future. Hence, SINGA is just an additional financing scheme and not an absolutely necessary funding source.
The Government's narrative about intergenerational equity is also not an accurate description of the SINGA scheme. Since there is no lack of fiscal resources, intergenerational equity can be achieved as long as the Government allocates the resources accordingly. There is no need to borrow to achieve intergenerational equity.
However, the Government's mention of intergenerational equity for the first time is heartening and I hope it will use it as a guiding principle from now on.
Up till now, the Government has always frontloaded all the infrastructural costs to the current generation of Singaporeans and, at the same time, parked a disproportionate amount of current fiscal resources into the national reserves.
In addition, the social security costs, namely, retirement and healthcare costs of Singaporeans, are all self-funded by themselves, without burdening the future generations. This is unlike the social systems in many developed countries like Japan where a major part of the taxes collected from the current working population is used to support the retirement and healthcare spending of the older retiree generation.
As a result, the current generation in Singapore has to shoulder a disproportionate amount of the infrastructure and social security costs and has to struggle with a lower level of disposable income, giving rise to the phenomenon popularised by Jack Neo's movie, "Money No Enough".
So, there is an urgent need to address this intergenerational inequity. However, SINGA is not necessarily the best way to achieve that. Rather, as I have said at the start, I support the SINGA scheme for better financial efficiency and fiscal accountability in the public finances.
For better financial efficiency, I would expect GIC/MAS to generate a higher return of at least 2% more than the borrowing cost of the SINGA loans.
Unless GIC/MAS can consistently earn a positive spread over the borrowing costs of the SINGA loans, there is no reason to borrow the SINGA loans and not make use of our current resources to fund our infrastructure projects.
The SINGA loans should also be issued as Singapore dollar-denominated securities to reduce foreign exchange exposure and to broaden and deepen our bond markets. It will be a big step forward for our local bond markets if the Government can issue Singapore Government Securities or bonds with longer maturities like 20 years and 30 years.
[Mr Speaker in the Chair]
For better fiscal accountability, I would expect to see the pre-investment feasibility studies for the SINGA projects to be subject to public consultation so that we can tap the collective wisdom of Singaporeans and not be guided only by the experts engaged by the Government. Regular progress reports of SINGA projects should also be submitted to Parliament for scrutiny. Mr Speaker, in Mandarin, please.
(In Mandarin): [Please refer to Vernacular Speech.] The SINGA Bill is no indication that the Government is short of funds for national development. Today, the total financial assets owned by our country have reached $1.35 trillion by end March 2020. And despite the drawdown for the five COVID-19 Supplementary Budgets, our total financial assets are probably still growing because large capital inflows should have allowed MAS to accumulate more foreign currency assets in order to keep the Singapore dollar within its policy band.
Even without touching the principal of the reserves, the Net Investment Return of about $40 billion a year from the reserves is enough to fund the infrastructural projects and social spending increases especially those in the healthcare area into the foreseeable future. Hence SINGA is just an additional financing scheme and not an absolutely necessary funding source.
Because we have the sufficient resources, we do not need to use SINGA to achieve intergenerational equity, that is, allocate national resources between generations fairly. As long as the Government recognises the huge size of our national reserves and that it continues to grow, we are already providing a strong safety net for our future generations. It is time that we do more for this present generation.
I support the SINGA Bill more because it can increase our financial efficiency and fiscal accountability. Financial efficiency means that, when the returns from the reserves are higher than the borrowing interest of international market, we should not tap on our current resources to fund significant infrastructure projects; instead, it is more worthwhile to borrow from the international financial market. SINGA therefore, provides an additional option for the Government.
We have issued more than S$700 billion Singapore-dollar bonds and treasury bills. But strictly speaking, these are not debts because this S$700 billion is reinvested in the financial assets of foreign countries through the GIC. It is only the SINGA loans that will be our real debts because these loans will be used for significant infrastructure projects. I therefore hope that the Government will increase the accountability for SINGA loans and report to Parliament regularly on the progress of these projects.
(In English): Mr Speaker, Sir, with no real lack of fiscal resources and SINGA as an additional funding source, the Progress Singapore Party (PSP) calls on the Government to review our long-term fiscal plan and allocate more funds to alleviate the financial pressures of our middle class Singaporeans and help them improve their quality of life.
This is necessary because the future of our country depends on a resilient Singaporean Core of skilled workers and motivated entrepreneurs. Mr Speaker, I support the Bill.
Mr Edward Chia.
Mr Speaker, Sir, Singapore has to continue to invest in competitive economic and efficient public services infrastructure. We need to do this with robust financial approaches that provide differentiated expenditure support. As such, I find the overall principles laid out for the SINGA bonds to be sound for our long-term infrastructure investments.
Having said that, the principle of equitable sharing of expenditure holds up best if the proposed infrastructure provides clear "net" benefits to the economy and society. This requires us to be prudent on our assessment of the infrastructure project investments' cost and benefits. If the cost outweighs the benefits, we could burden future generations with a potential growing net debt load and this is an outcome we must avoid.
It is also important to stress that SINGA, like any other forms of borrowings, needs to be repaid. We need to ensure that future revenue growths can accommodate the repayments and maintain Singapore's strong balance sheet and credit ratings.
I have met some residents who expressed concerns on whether we are passing on debt to future generations. Residents have expressed that we need to be cautious and ensure we pass on assets and not liabilities to our children. With their concerns included, I would like to make five clarifications.
One, the $90 billion limit is about 20% of current Gross Domestic Product (GDP) which is lower than the past six Development Loan Acts, which was near 40% of GDP. Having said that, our GDP in the past had higher year-on-year growth rates. Hence, may I ask to what extent the limit took into account future growth trends in the coming years, especially when we are expecting a slower recovery due to both the COVID-19 context and ourselves a maturing economy?
Two, how did the setting of a minimum project qualification sum at $4 billion come about and what would be the considerations in the future for adjustments of this minimum sum qualification criterion?
Three, could the risk and benefit assessment matrix that the Government intends to use for deciding on projects be shared with Parliament, please?
Four, will the duration of the issued bonds dovetail with the payback period of the project to prevent a scenario where a bond needs to be extended with higher interest rates and, thereby, adding more expenditure to recurrent Government Budgets?
Five, as a key principle of SINGA bonds is the equitable sharing of cost across generations, will capitalisation and depreciation be linear throughout or frontloaded to take into account higher maintenance cost in later years?
Lastly, I would suggest to include initiatives to ensure that infrastructures are built to cater for larger capacity and with better materials, methodologies and technologies. These may translate into higher capital cost today, but can lower downstream cost expenditure for an ageing asset, adding to my previous point on avoiding putting burden on maintenance cost on future generations of Singaporeans.
Mr Speaker, Sir, investment in public infrastructure is certainly beneficial for Singapore and Singaporeans. We, however, must continue to be prudent on the deployment of these funds as the effects will ripple and reverberate into multiple generations of Singaporeans. Mr Speaker, Sir, notwithstanding the considerations and clarifications I have raised, I support the SINGA Bill.
Mr Murali Pillai.
Mr Speaker, Sir, I support the Bill.
The logic behind it is compelling. The current proposal presents an opportunity to arbitrage – we can make more with our capital in our reserves, generating returns to fund our social programmes, as compared to the cost of borrowing. So, it makes sense to borrow under these prevailing circumstances where there is low interest rate and we enjoy a good credit rating.
Notwithstanding that, circumstances can change. And in that regard, I am happy to note the Government's safeguards built into this Bill.
One safeguard is that the infrastructure developments must last for at least 50 years. I listened intently to the speech of the hon Member Assoc Prof Jamus Lim when he argued that infrastructure should be extended to not just hard infrastructure, but also soft infrastructure. And by that, he meant an investment in health, education, accumulation of knowledge and human capital. While I listened to him, I think there is a lot of agreement, as opposed to disagreement, on the need to invest in these areas. In fact, if we were to reflect back on how the Government has been investing in these areas – things like SkillsFuture, building more hospitals, schools – we can see that that is also part of what the governing party is doing, investing in soft infrastructure.
The focus of this Bill, however, is financing infrastructure. And this is where we need to be careful because we are talking about sending a bill to our children, our children's children to settle. And I thought what the hon Member Prof Hoon Hian Teck said was quite compelling because he cautioned that the situation can change. There could be a situation whereby the safe interest rate, in his words, can increase. And this is where I think the rub lies. What are the infrastructure developments we should send to be settled by our children and our children's children? Here, I would respectfully submit that it is safer and more prudent for us to invest in soft infrastructure as much as we can and settle the bill ourselves. But when it comes to infrastructure developments which lasts for generations, to achieve – in the words of Prof Hoon Hian Teck – intergenerational distributive justice, then it makes sense to consider the format that we have in the SINGA Bill.
There are two other safeguards which I thought was laudatory: the gross borrowing limit of $90 billion, which is about 20% of our Singapore's GDP, as well as the interest threshold of $5 billion per year and this limits the Government's ability to borrow if interest rates go up. I have two points to make. First on the nature and the structure of the bonds and, second, on the realities of implementation.
First, on the nature and structure of the bonds. In this regard, I have two points to make. First, the interplay between the constitutional safeguards – and the hon Deputy Prime Minister mentioned the Reserves Protection Framework – and SINGA. As mentioned by the hon Deputy Prime Minister, Article 144 of the Constitution is engaged, and he highlighted that the in-principle approval of the President has been obtained for the passing of this Bill. And it was specifically mentioned that Her Excellency agreed to a borrowing limit of $90 billion. My question relates to the workings of the procedure. Say, for example, the Bill is passed and the Government intends to issue bonds. Would the Government come back to Parliament for a resolution to be passed and would it still be subject to the discretionary approval of the President? I respectfully seek a clarification from the Deputy Prime Minister on this matter.
The second point I wish to make is in relation to our commitment to green bonds. The hon Deputy Prime Minister Heng mentioned in February 2021 that Singapore will issue green bonds on select public infrastructure projects, with up to $19 billion of public sector green projects already identified. Today, he mentioned that one of the objectives of SINGA is to build a safe, green, liveable environment.
To further encourage sustainability efforts, would the Government be minded to stipulate at least a minimum percentage of SINGA bonds that will be green? This will have a salutatory effect of ensuring the high percentage of infrastructural projects being undertaken in Singapore with sustainable measures in place.
On to my second point about the realities of implementation. What about projects that may, for one reason or another, be aborted? For instance, when there is a change in government. We cannot predict the future, but we have seen examples all over the world. One government may come in and say it wishes to build a wall. Another government may say no. Closer to home, one government may say "build a high-speed railway system"; another government may decide not to do it. Would it not be prudent to work in a requirement that the government of the day which wishes to abandon infrastructural projects funded by SINGA bonds must ensure that it is able to finance the abortive costs from its current revenue?
Sir, I conclude. The logic behind this Bill is compelling, but I sense nervousness in the speeches of the hon Members, such as Mr Edward Chia, Mr Liang Eng Hwa and Ms Foo Mee Har. And it is understandable, because borrowing always entails a risk, just as the fruits of spending are always alluring. But I am satisfied that the safeguards that the hon Deputy Prime Minister highlighted are safeguards that will stand us in good stead. So, notwithstanding my comments, Sir, I support the Bill.
Mr Speaker, I would like to start by declaring my interest as an employee of a financial institution here in Singapore.
Mr Speaker, I would like to begin by extending my support for the Significant Infrastructure Government Loan Act, or SINGA in short. In October last year, I shared that there is scope to rethink Singapore's position on debt, instead of funding our expenditures solely with higher cost equity funding or funding from our reserves. This is especially if the funds are being used for quality investment projects that will benefit current and future generations of Singaporeans.
Today’s Bill represents an important milestone for us as a country and, while it may have been a little later than some had hoped, it is, indeed, better late than never. In finance, we often speak of an optimal capital structure for a firm – the ability to have a proportion of debt and equity that results in the lowest Weighted Average Cost of Capital (WACC) when making the capital management decision. While certain commentators may liken Government finances to a household budget, unlike a household, firms and countries can be assumed to last into perpetuity.
Debt is not inherently bad per se and, if it can be employed effectively to increase returns or result in a lower WACC on an overall basis, then it should always be considered as a viable option. Moreover, while we can have a different philosophical view of what the ideal structure should be on the national level, we must be keenly aware that equity funding or funding from our reserves is not free.
I would now like to take the time to seek some clarifications on several points in this Bill.
The first is on the capitalisation of expenditure on nationally significant infrastructure. Again, this is another welcome change from an alignment of accounting practices point of view. After all, the long useful lives of infrastructure projects do suggest that they clearly fall under the accounting definition of an asset, as it is a present economic resource that has the potential to produce economic benefits. This change is in contrast to the current practice of charging off development expenditure annually. As an example, a $1 billion project today with a useful life of 50 years is charged to the financial statements at 2% annually, which represents a $20 million annual depreciation charge. This is a fraction of what it would have been had we stuck to the current accounting treatment.
In FY2018 and FY2019, actual total development expenditure was $20.3 billion and $16.7 billion respectively, while the revised development expenditure in 2020 was $16.4 billion and the estimated expenditure in 2021 will be $19.9 billion.
Mr Speaker, I would like to ask, based on the adoption of capitalising long-term assets as an accounting treatment, how much of our development expenditure in dollar terms would be freed up annually?
The second point I would like to talk about is the type of projects which have been identified for the purpose of SINGA. These include infrastructure intended for a list of specific purposes as listed in section 2, such as transport, water treatment, alleviation of floods and so on.
The new MRT lines, such as the next phases of the Thomson-East Coast Line, the Jurong Regional Line and Cross Island Line, as well as the extension of current lines, such as the North-East Line, Downtown Line and projects, such as the Deep Tunnel Sewage System as mentioned by Deputy Prime Minister Heng, are projects that would fall under the scope of SINGA. I would like to ask the Deputy Prime Minister how was the final list of use categories identified and chosen?
My colleague Assoc Prof Jamus Lim has built a strong case for human capital as a form of soft infrastructure investment. Indeed, when we look at US President Biden's $2 trillion infrastructure plan, we see that it includes a planned funding of the care economy, which includes $400 billion towards expanding access to quality, affordable home- or community-based care for the elderly and people with disabilities. It will also cover investments in schools, childcare facilities and workforce development programmes, among others.
In a knowledge-based economy, intellectual and human capital are just as important, if not more important than physical hard assets. We should not solely be focusing on conventional property, plants and equipment as possible infrastructure projects to finance with borrowing. As it is, intellectual property and other intangible assets can already be capitalised under a firm’s balance sheet under accounting rules, given the recognition of the economic benefits that they generate. As a Government, we should seriously consider this as an extension of the SINGA Bill, as compared to only that of traditional infrastructure assets.
Third, I note that these projects need to have a useful life of at least 50 years. As shared by my colleague Assoc Prof Jamus Lim, many existing infrastructure projects would not have qualified under this rather long timespan. I am concerned about how practical that might be in an era where technological and environmental needs are changing so rapidly. If climate change were, indeed, a motivating factor for the need for infrastructure changes, it would be far from accurate to assume that any infrastructure planning now will be useful for the next 50 years.
Rapid technological changes have shaped the tech infrastructure needed to keep our economy competitive. Over the past 20 years, we have moved from an era of 3G cellular networks in the 2000s, to 4G in 2010s and, finally, the rolling out of 5G networks from 2020. That is roughly a 10-year gap between each generation of cellular networks. It would be extremely difficult for anyone to predict with utmost confidence if the infrastructure we are building for 5G today, for example, will continue to be relevant 10 or even 20 years down the line, let alone 50 years at a minimum.
Our MRT systems are yet another example. First constructed more than 30 years ago, the replacement of sleepers, signalling equipment, track upgrading and power supply systems over the last couple of years have meant that it is as good as replacing the entire system with a brand-new set. Even power plants, such as one of the newer CCGT plants in Singapore, only have a useful life of around 25 years.
My fourth point covers that of green financing. We aspire to be a green hub and we have laid out grand plans in our current Singapore Green Plan 2030. From my understanding, some of these projects, such as Tuas Nexus, have been identified. In trying to keep in line with these aims, I would like to ask the Deputy Prime Minister, out of the $90 billion set aside for SINGA, how much of this would be set aside for green infrastructure? As a Government, we should aspire to lead by example and set a laudable target for how much we plan to spend on green infrastructure itself.
Further, I believe that the financing of nationally significant infrastructure should be tied to the mandatory completion of rigorous environmental, heritage and social impact assessments done using the best available science at reasonable cost. Such studies should be made fully available to the public for feedback and for the public to take any private mitigation measures if necessary. This would then allow the full buy-in from society at large on the benefits of such infrastructure projects.
I recognise that advisory services, such as the associated design, investigative and engineering studies, surveys or, say, research, are already deemed as qualifying capital expenditure. The key caveat here, of course, is that such advisory services have to be reasonable, relative to the total project cost. Even though I am sure there are many considerations and technical challenges to work through, it would be unwise if consultancy fees end up being 90% of the cost of the actual project, for example. So, I wonder if the Government would also include limits on how much should be spent on advisory fees, as compared to the overall construction cost of the project.
The fifth point I would like to cover looks at some of the numbers as specified within the SINGA Bill.
The first question is on the $90 billion loan limit which has been put in place. Debt levels, in themselves, cannot be seen in isolation and we need to assuage Singaporeans that the level of borrowing is not unsustainable. Credit rating agencies often compare debt levels to net worth or net assets or, in the case of sovereign credit ratings, usable reserves, for example. My question for the Deputy Prime Minister, therefore, is how much does this $90 billion represent, relative to Singapore's current account receipts and reserves?
Further, Minister Ong Ye Kung has mentioned that we would need to spend more than $60 billion over this decade to expand and renew our rail networks while Prime Minister Lee has mentioned that Singapore is probably going to spend $100 billion, possibly more, to protect our country against rising sea levels.
I would thus like to ask the Deputy Prime Minister to put into context how is this sum of $90 billion of debt financing determined? And if there are any quantifiable targets such as the total expected infrastructure spending in dollar terms over the next one to two decades? And how much of the funds are already earmarked for specific projects?
On the total effective interest paid or payable of $5 billion, that would imply a total yield to maturity of 5.6% on the loan limit of $90 billion. How does this compare to the current and future expected Singapore Government Securities yields that the Ministry is projecting?
Singapore's 10-year bond yields stand about 1.5% today while 30-year bond yields are about 1.9%. Based on my checks, historical average bond yields of varying bond durations are only at about 2.5% to 2.8%, notwithstanding a wide range of less than 1% to almost 5%, 6%. But yet this is significantly lower. The average is significantly lower than the implied yield to maturity of 5.6%.
Lastly, with regards to the qualifying amount of capital expenditure being at least $4 billion or more, I would like to ask the Deputy Prime Minister how this number was derived as well?
In 2008, the KPE was built at a cost of $1.8 billion. Inflation, notwithstanding, the value that the project has brought to Singaporeans has been immense, especially residents staying in the Northeast, such as that of our Sengkang residents. In 2014, the 800-megawatt state-of-the-art power plant by PacificLight was built at a cost of $1.2 billion. Despite the size and value that these projects bring, they hardly come close to the qualifying amount of $4 billion or more.
There is also a question of whether the definition of "nationally significant infrastructure" being defined under Part I as being geographically located "in Singapore" may restrict the spending needs for infrastructure that crosses borders. A nationally significant infrastructure, the Linggiu Reservoir, which Singapore built at a cost of more than $300 million in Malaysia comes to mind.
Further, should the Government decide to set a much more ambitious, renewable energy target, the infrastructure costs for the import of electricity, especially solar electricity from overseas, would also not fall within the purview of this SINGA Bill.
Mr Speaker, I like to conclude with two parting thoughts.
The first is that, I agree with Deputy Prime Minister Heng that there should be various strict safeguards on the projects that can qualify for borrowing and the amounts that can be borrowed. Similarly, when it comes the use of our reserves via the NIRC, it too has strict safeguards in place. Ultimately, any sound policy decision should have safeguards built in and, hence, if we decide to tap on Singapore's ample fiscal space to fund our investments into our people, we should not fear the slippery slope of there not being any safeguards that can be put in place.
The second is that, again, I agree with Deputy Prime Minister Heng that borrowing for nationally significant infrastructure will spread these lumpy expenditures across the generations who will benefit. If we want to be a progressive society that firmly believes in the principles of fairness, we should also be acutely aware that the converse is also true. Besides Changi Airport Terminals 1 and 2 and the first MRT project, the Government has not borrowed to fund other infrastructure projects since the 1990s.
In essence, the generation that came before us has borne a significant cost of infrastructure development upfront for our benefit without having the cost spread equitably across generations. Despite a lifetime of hard work and contributions to our nation, sadly more than half of our seniors do not appear to have sufficient funds to retire comfortably. We should never forget the sacrifices the earlier generations of Singaporeans have made in building this nation and must always keep this in mind. Needless to say, we should never contemplate taking any future decision that could potentially add to their tax burden. Mr Speaker, I support the Bill.
Assoc Prof Jamus Lim, any clarifications?
Thank you, Mr Speaker, for the recognition. If I may just quickly respond to Member Mr Murali who raised two points actually. The first, he talked about financing versus investment and he stressed the point that the Government, indeed, has invested quite a bit in soft infrastructure and human capital projects. I agree with that. And then, he said that the purpose of this Bill is actually for financing.
We must remember the context. The context is that the interest rates are currently low. So, when we say that we want to invest in infrastructure, hard infrastructure, but not soft infrastructure, it seems like we are only willing to offer the terms of favourable interest rates for physical capital and not human capital. For me, that is like saying that we think it is equally important to educate both our son and our daughter, but sure, we will finance Ah Boy's schooling but Ah Girl, you go work so that you can pay for your school fees.
And the other point which is worth pointing out is something that other Members, including Prof Hoon, mentioned, which is that we always need to think about the returns when we invest in a project. I agree with this and this is why in my speech, I demonstrated that returns on soft infrastructure actually dominate those of hard, which is yet another reason why we want to invest in soft infrastructure in this Bill.
Mr Xie Yao Quan.
Mr Speaker, Sir, I will make three observations and raise three suggestions on the proposed SINGA Bill.
First, my three observations, which all relate to the larger point about long-term planning. Fundamentally, SINGA reflects this Government's commitment and orientation to plan for the long term and govern in the long-term interest of Singapore. So, my first observation is about this Government's long-term plan for our national infrastructure.
There are very bold, ambitious plans, for Changi Airport Terminal 5 and a third runway, for a mega seaport in Tuas, for a massive expansion in our MRT rail network, and much more, all in turn to anchor Singapore's next phase of development, well into SG100.
At the same time, SINGA has an eye on the Government's 100-year plan for our coastal defence infrastructure, to secure Singapore against the very long-term threat of rising sea levels posed by climate change. These long-term infrastructural plans are essential to our mission of continuing to improve the lives of Singaporeans, present and future.
Indeed, our history clearly shows how we are the current beneficiaries of long-term plans and big bets in strategic infrastructure that previous Governments had made.
For example, plans for the first container terminal in Singapore – and the region – located at Tanjong Pagar were made way back in the 1960s, when containerisation was not yet the norm, in fact far from it. The Government then had to borrow $45 million from the World Bank, a very handsome sum back then, and the container terminal was completed in 1972.
The first vessel the Terminal received had 300 containers on board; compared to the more than 1,000 people gathered on shore to receive it. So, 300 containers, 1,000 people receiving that.
And in fact, container volumes did not really take off, until the next decade, in the 1980s.
But finally, the long-term bet paid off, and since then, more long-term plans had been made and implemented for the Brani Terminal in the 1990s, Pasir Panjang Phase 1 and 2 in the 2000s, and Phase 3 and 4 in the last decade, such that we have the Port of Singapore that we have of today, after almost 60 years since the first plan for a container port was laid.
In short, it was a decisive bet, a far-sighted decision and a constant focus on what is next and what is on the horizon that had allowed Singapore to move ahead and stay ahead of the competition.
It was a similar story with Changi Airport. Plans were made in the 1970s, with the aim then already to be Asia's largest airport at that time of opening. A significant amount of land had to be reclaimed, and Terminal 1 opened in 1981. Plans were made in 1970s, Terminal 1 opened in 1981. Terminal 2 then opened in the next decade, in 1991. Followed by Terminal 3 in the decade after that, in 2008. And of course, Terminal 4, in the following decade, in 2016.
So, decade after decade, a quantum leap each time, anchored on robust long-term planning and execution.
Looking ahead, therefore, SINGA, I think, underlies this Government's continued commitment to a long-term, ambitious strategy for our national infrastructure, to secure our future and success well into SG100.
My second observation about long-term planning is about this Government's commitment to a long-term fiscal strategy, to sustain and properly steward our strategic fiscal resources and to take full advantage of our strong fiscal standing, in the best long-term interest of Singapore.
Crucially, the Government is not looking to borrow for significant infrastructure because it lacks money. Quite the contrary, it is looking to borrow, so as to take full advantage of our fiscal strength and the expected low cost of debt capital going forward, instead of expending our existing financial resources for lumpy infrastructural outlays, when these resources could be deployed and invested to generate good returns for Singapore and Singaporeans.
In other words, the Government's strategy of borrowing for infrastructure on the one hand and investing on the other is an astute, long-term strategy to fully leverage relatively low interest rates and avoid the opportunity cost of dipping into our own resources.
The third observation I would make is this: beyond SINGA, beyond physical infrastructure, I think successive Governments have always made long-term plans and investment in our soft infrastructure, in human capital development, to ultimately improve the lives of Singaporeans.
And it will continue be a constant work in progress but let us look at their track records.
Through the decades, successive Governments had invested steadily and decisively in education, in skilling Singaporeans, because ultimately, that is our surest way to better opportunities and better lives. From $6.5 billion in the 2003 Budget, to $12 billion, $13 billion in recent years. And from a focus on 15, 16 years of formal schooling, to now learning for life. I think it is clear to see how much successive Governments had invested in education for Singaporeans.
Successive Governments had also invested steadily in Singaporeans' health. From $2 billion in 2003, to $6 billion in 2013, to $12 billion in 2019. And of course, this Government has said that it would do even more going forward.
Successive Governments had invested billions in defence, which is in turn absolutely vital to create the basic conditions for Singapore to thrive. They have invested significantly in research and the building up of our base economic capabilities and they have invested significantly in our social capital to strengthen our social safety nets.
And so, we need to look beyond SINGA, beyond physical infrastructure, about successive Governments', including this Government's approach to long-term planning and development in general which has always been about the whole of society, the whole of nation.
Sir, I have three suggestions on the proposed provisions of SINGA.
My first suggestion is to lower the cap on total borrowings. The proposed cap of $90 billion in the Bill represents roughly 18% of GDP. This is quite significant, especially if a profligate government were to take over and on this, I echo Member Murali Pillai's point about us not knowing what will happen in the future.
Ninety billion dollars is not quite enough to run the country to the ground, but certainly enough to cause a rather bad bout of indigestion.
And so, to maintain public confidence, I suggest that the initial cap be lowered to $50 billion, which would represent roughly 10% of GDP. This lower cap would nonetheless give the Minister sufficient space to operate within the Act initially, and the Government can always come back to Parliament when there is a need for the borrowing cap to be raised beyond that.
My second suggestion is to lower the cap for total interest payments. The proposed cap of $5 billion in interest payments alone represents almost a quarter of our entire development outlay per year in recent years. To signal prudence, I suggest that the initial cap be limited to $2.5 billion, or roughly 10% of recent annual development outlays. Given our credit rating and trends in long-term interest rates, I think this lower cap should be quite practicable.
My third and final suggestion is to reconsider the qualifying limit of $4 billion for a nationally significant infrastructure project. I would like to ask the Ministry how narrow a range of projects it expects to qualify under the Act given the proposed limit of $4 billion. Would major healthcare infrastructure projects, for example, which usually cost around $1 billion to $2 billion each, make the cut? If not, why not, if we agree that the value of healthcare infrastructure, in terms of its social value, is certainly of national significance?
Since we have the safeguards on total borrowing and total interests, I suggest we lower the qualifying limit for projects so that the scope of qualifying projects of national significance can be made more inclusive and more flexible. Mr Speaker, Sir, the above suggestions notwithstanding, I stand in support of the Bill.
Mr Saktiandi Supaat.
Mr Speaker, Sir, the concept of borrowing, taking on debt, may have a negative connotation. This is especially so in Singapore where our Government is known for its long-running commitment to prudence.
But the fact that the Government has tabled the SINGA Bill is testament to a sustained commitment for fair intergenerational equity, prudent spending and an enhancement to our differentiated financing strategy beyond. This is a necessary response to an expected spike in development expenditure in the next decade to address infrastructural needs and existential threats like climate change and rising sea levels but also taking into consideration the low interest rate environment we are in for now.
This is a bit different from what the hon Member from Sengkang GRC mentioned, about spending further on human capital. It would be useful to find out from him how much more he would like to borrow on human capital, given that Singapore is already the highest ranked in the World Bank's Human Capital Index report. Just to explain, the Human Capital Index by the World Bank measures countries best in mobilising economic and potential of its citizens. We are already ranked highest and I think the Government has put in quite a bit already in terms of human capital. After all, Singapore's best resource or most important resource is our people. I would just want to probably seek a clarification from the Member from Sengkang GRC on that point – how much does he plan to borrow for human capital.
Mr Speaker, I support this Bill as it is fair and efficient. It is fair because it supports intergenerational equity. Without borrowing, the expenses for the infrastructure would have to be shouldered by the current Government for projects that may only demonstrate their potential in decades to come. With SINGA, the upfront development expenditure is converted into a stream of annual depreciation over the useful life of the project. As the infrastructure is improved over the years, future generations pay directly for the enhanced benefits enjoyed. So, there is capital efficiency as we will benefit from low interest rates, given our AAA credit rating.
In addition, the SINGA bonds could potentially extend the Singapore Government Securities (SGS) yield curve beyond its current 30-year maturity depending on investor demand and primary dealers' market making obligations. This helps in deepening the bond market domestically too.
But, Mr Speaker, for the man on the street, beyond the technical terms, there may emerge concerns that with the formation of SINGA, we will be tapping on bond markets and see more foreign exchange exposure for our long-term infrastructure spending. These are valid concerns, especially if there are some level of market exposure and liabilities that may be created.
Firstly, is there a plausible worst-case scenario in tapping the bond markets for the first time over the long term for infrastructure spending?
Mr Speaker, Sir, I am confident of our Government's fiscal discipline and our cash management ability. Our finances are strong, with assets well in excess of liabilities. This is being demonstrated in the COVID-19 crisis, where the Government could purchase vaccines for the whole population while introducing various financial assistance schemes to help citizens and keep the economy and job market abreast.
But complacency is dangerous. Looking ahead, I would like to ask if the Government has considered the plausible worst-case scenarios that would see the Government's balance sheets and net foreign assets being weakened? What if our capital efficiency advantage weakens as global interest rates rise sharply?
The Deputy Prime Minister explained it very clearly and in detailed form in his speech earlier when talking about the 5.5% effective yield-to-maturity rates. But my question is: has MOF and other economic policy agencies such as MAS done counter-factual simulations using market shock variable?. What are the risks going forward?
The Bill has also importantly spelt out crystal-clear clauses for safeguards. There will be a gross borrowing limit of $90 billion. The Government cannot raise more than this amount in loans under SINGA without legislative amendments. There is also an annual interest rate threshold of $5 billion. These measures will ensure the future generations will not end up with burdensome financing costs.
But, may I ask the Minister if our debt servicing costs will be funded by our annual Budget and met from our overall revenue? If so, assuming we have a full $90 billion issuance and we are constrained by our current principle of having an overall balanced Budget over each term of Government, can the Minister share if this will affect our annual fiscal policy options in periods of extreme crisis in the future?
Mr Speaker, Sir, secondly, since we know autonomous flows – for instance, changes in the stock of outstanding SGS where net issuance of SGS actually drains liquidity from the domestic banking system, how will the new SINGA SGS securities issuance affect our financial system liquidity as well as the Singapore dollar during times of financial market stress when banks may also desire to hold larger buffers of liquidity? The amount that we are borrowing – up to $90 billion – can be quite significant.
Thirdly, may I ask the Deputy Prime Minister on the SINGA infrastructure bond issuance: what are our baseline economic assumptions and how do we ensure issuance supply is calibrated to market demand? What tenors would be issued under SINGA? Following the introduction of SINGA, will the duration of the SGS market change over the medium term?
On a separate issue, some projects were previously placed under Statutory Board issuance but moving forward, will these be funded by the SINGA bonds if they qualify? It is useful to know if the SINGA bond issuance will have a crowding out effect on future bond issuances by Statutory Boards.
Mr Speaker, so far, the market seems receptive to the potential of SINGA bonds based on the prices of the yield curves when it was announced.
Globally, there has been steady growth in sovereign green, social and sustainable, or GSS, bond issuances in the past years. Looking at the experience of Germany's sovereign green bonds, there might be room for a sustained premium or lower yield to green issues versus conventional issues. Recently, Germany issued green bond counterparts to its 10-year and five-year conventional bonds. In both cases, the green bonds were priced at a premium when issued. They seem to have consistently maintained lower yields as well as exhibiting lower volatility than their conventional versions.
May I also ask the Deputy Prime Minister, if the Government will issue green bonds to the public under SINGA and what will these infrastructure projects likely be focused on?
Finally, I am glad to note that the majority of Government borrowing will still be for non-spending purposes such as meeting the investment needs of the CPF for Singaporeans' retirement and for market development and there are strict eligibility criteria in place to ensure that qualifying SINGA bond projects are truly essential to national interests. This is a forward-looking Bill with Singapore's economic, environmental and social sustainability in mind. Mr Speaker, I support the Bill.
Mr Speaker, Sir, I agree that it is necessary to exercise good fiscal prudence by capping SINGA gross borrowings at $90 billion and setting the annual interest ceiling at $5 billion. I have some queries about these limits.
Firstly, I would like to ask whether these two controls are independent of one another. If they are related, assuming that we reach the maximum borrowing of $90 billion based on the $5 billion annual interest payment, the borrowing rate is 5.5% per annum. It would appear that the annual interest threshold is set rather high, considering that the coupon rate of a 30-year Temasek bond is only 2.25% per annum. Would the Minister elaborate on why the annual interest threshold is set at $5 billion?
Another question is why is the minimum project cost set at $4 billion? To put this figure in context, a massive project like the iconic Sports Hub incurred only $1.3 billion in construction costs.
Instead of an aggregate limit of $90 billion, is it possible to consider an annual debt ceiling which is based on the estimated infrastructure expenditure over the next 10 to 15 years? We have seen how costs have ballooned over the past one year and costs will only continue to escalate in the future. Can we consider a short-term debt ceiling? For example, net short-term debt should not exceed a certain percentage of budgeted expenditure in a financial year. We can have a separate category for long-term debt.
Singapore's institutional framework has often been praised for its high level of quality, predictability and transparency. Although it was brought up during the Committee of Supply debate in March, I wonder if we could set such prudent debt limits in consultation with our citizens? I understand that in New Zealand, for example, the government had organised consultative sessions with industry bodies and its citizens to share the need to borrow or issue bonds.
I fully support the decision to issue green bonds to fund environmentally sustainable long-term projects under SINGA. This will result in a deeper and more varied Singapore bond market, providing more opportunities for long-term investors.
Would the Government set aside a good portion of SINGA bonds for retail investors? I hope a significant portion in affordable denominations can be reserved for Singaporeans so that more of our citizens can own a piece of our country's future development.
I would like to ask if there will be any issuance in US dollars or the euro so as to tap the pool of international investors. With the growing concern and interest in environmental issues globally, we will be able to attract a substantial pool of international green investors.
As what Member Saktiandi Supaat has said, drawing on the experience of Germany's sovereign green bonds, our potential investors should be able to attach a durable premium – in other words, lower yield – to green issues versus the conventional ones. I understand that many investors who support green initiatives accept lower yields because it is important for them to finance environmentally responsible projects.
With aligned goals for the benefit of our planet, our green issues should do well. How much of the SINGA bonds will be green? Would the Minister provide estimates for the various initiatives in our Singapore Green Plan 2030 and fight against climate change which will be supported by the SINGA green bonds, such as the construction of polders and so forth?
Can we set out a range of planning instruments relating to the provision of infrastructure? These can include a 20- to 30-year infrastructure strategy and 10-year plans for services and activities broken down to how they are related to financial strategies and annual plans.
Next, I would like to ask if bond issuance is the only mechanism to fund infrastructure development. How about public-private partnerships or crowdfunding? Perhaps we should look into the availability of private partners for public-private partnerships to finance local investments, for example, special purpose vehicles or lease contracts.
I hope Singapore's sovereign rating remains AAA forever. However, in the event that our rating deteriorates, to limit financial risks, derivative contracts should not be allowed and speculative positions with derivatives should not be permitted. Mr Speaker, Sir, in Mandarin.
(In Mandarin): [Please refer to Vernacular Speech.] The Significant Infrastructure Government Loan Bill will play a vital role in the development of our country's infrastructure construction in the future. With complete infrastructure and social resources such as sea walls, transportation, hospitals and schools, we can build a beautiful, sustainable and warm home, an ideal home where the capable can be gainfully employed, the young can learn, the sick can be treated and the elderly can find joy. I would also like to take this opportunity to thank Deputy Prime Minister Heng for his contribution to Singapore in his capacity as Finance Minister.
(In English): I support the Bill.
Sir, SINGA will allow the Government to better finance large, nationally significant infrastructure projects. This will materially improve national productivity and benefit the society and the environment.
Additionally, given the substantial drawing of national reserves to finance the costs from the COVID-19 pandemic, SINGA will create extra fiscal space and allow for the debt to be paid back in a manner that is equitable across generations.
That said, this is the first time in 40 years that the Government will be borrowing very large sums of money. It is important to have strict and robust safeguards in place to ensure that the borrowing is sustainable and prudent.
I have two areas of clarifications on the Bill.
My first area of clarification is on safeguarding the proper use of the loans. Deputy Prime Minister has provided assurances that the Bill includes "strict safeguards on the projects that can qualify for borrowing and the amounts that can be borrowed".
Key safeguards include the $90 billion gross limit on borrowing and an annual interest threshold of $5 billion. Future changes to the gross borrowing limit and annual interest threshold can only be made by introducing a new Bill in Parliament.
However, the definition of "nationally significant infrastructure" laid out in the new section 2(1) can be broadly construed.
Secondly, the $90 billion gross borrowing limit is not an insignificant amount. It is equivalent to about two-thirds of total outstanding Singapore Government Securities (SGS). Can the Deputy Prime Minister share what checks are in place to ensure that the loan is used in a manner that is responsible, prudent and sustainable by the party the loan is issued to?
Thirdly, the Government trusts that Singapore would likely benefit from favourable interest rates given Singapore's AAA credit rating and the current market environment. Low interest rates would keep the intergenerational costs of public debt low.
However, in the off-chance that interest rates rise substantially, what contingency plans does the Ministry have in place to finance the debt in a way that does not impose a huge burden on future generations?
My second area of clarification is around financing green infrastructure projects. With SINGA, the Government will issue a new category of government infrastructure bond, termed SGS (Infrastructure). Green bonds will form a subset of SGS (Infrastructure).
Firstly, will the SGS (Infrastructure) green bonds take reference from credible international bond standards? Examples of these standards include the International Capital Market Association (ICMA)'s Green Bond Principles, EU Green Bond Standards and the ASEAN Green Bond Standards.
Taking reference from these "green" standards can be important in giving lenders and financiers assurance and confidence that green financing is true to its label.
Secondly, can the Deputy Prime Minister clarify if there are plans to designate a set proportion of SGS (Infrastructure) bonds as green bonds for climate mitigation and adaptation efforts? If not, can Deputy Prime Minister, together with MSE, consider doing so? For example, these green bonds could be used to fund some of the $19 billion of public sector green projects identified in the Singapore Green Plan 2030.
Thirdly, I understand that there are plans for SINGA to finance the building of climate adaptation structures, such as sea walls, dykes, floodgates, barrages and coastal pumping stations to mitigate the risks of rising sea levels.
Sir, notwithstanding these clarifications, I stand in support of the Bill.
Mr Speaker, Sir, in March this year, the local media reported that Singapore was ranked 11th in the world in the latest Schroders Global Cities index. This index ranked cities by measuring key dimensions, such as economic dynamism, innovation, sustainable environmental policies as well as transportation. Transportation infrastructure is a new factor included by the researchers this year as they noted it is critical to supporting social mobility, a key feature of great cities. Singapore will need to continue to invest in its infrastructure for its long-term development to continue to be amongst the top cities in the world for its citizens to live in and be an international place to do business.
Given the need to continue to develop our MRT lines, infrastructure to adapt to climate change as well as sewerage systems, it is logical and a sensible thing for our Government to finance these projects through borrowings to spread the lumpiness of the cost to match the benefits that will accrue over time. I fundamentally agree with this approach as it is also economically efficient given the ability of Singapore to tap the debt markets.
Given the past and continued strong track record of this Government, we have every reason to be confident that the SINGA Bill would be used optimally for the benefit of our citizens. Notwithstanding this, I am glad that there have been ample safeguards built into this legislation, such as, one, a precise definition of what an "infrastructure project" means to eliminate the possibility of using this Bill as a backdoor way to spend on soft investments; and two, a clear definition of "qualifying capital expenditure" to exclude expenditures, such as the cost of repairs and maintenance which should be rightfully expensed when incurred and therefore not be allowed for capitalisation.
This will ensure that such expenses, including soft investments, will need to be transparently put before this House as part of our annual Budget debate.
While we are on the topic of safeguards, since significant infrastructure have long development lead times as well as useful life, can the Deputy Prime Minister clarify how will the financial mechanism be applied to decide on the borrowing tenor since most of these public projects are unlikely to have a clear cashflow stream?
The Deputy Prime Minister had mentioned that nationally significant infrastructure funding is managed on a bond portfolio approach. However, a portfolio is made up of many projects. The question I have is that, at a project level, for example, if the useful life of the flood defences project is 50 years, can the Government decide to fund this through a shorter borrowing tenor of, say, 10 years? If so, when the time comes for rolling over the borrowings, interest rates could have risen potentially, leaving the future term of Government with a higher interest rate expense.
In short, as interest rate trends are not always predictable, the question more broadly is: how will the Government hedge the interest rate risk since we ought to also protect the future generation from shouldering an unexpected debt servicing burden?
Clause 5 (1)(b) limits the total effective interest rate paid on the securities issued under this legislation to be no more than S$5 billion. Effectively, the Bill provides an implied interest cap of around 5.5% against the total SINGA bonds of S$90 billion. This rate appears to be a good and reasonable control in the context of today's low interest rate environment. However, I note that 10-year SGS yields were over 5% in the late 1990s.
If there is a resurgence of inflation, which is not unlikely, given the massive stimulus by governments, such as the US, and a corresponding rise in the level of risk-free rates, it is good that the future Government be required to come back to debate and receive support from this House.
While this legislation will help address the funding of our significant infrastructure needs, from a financial market development standpoint, the issuance of SINGA bonds will help further deepen Singapore as an international financial market. Currently, there is lower liquidity at the longer end of the sovereign rate curve given that the Government has had little need to issue longer dated financial instruments. With SINGA bonds issued with longer tenors, this can help build out a longer term risk-free curve which financial institutions need for referencing the pricing of long-dated projects, such as project finance loans as an example. Additionally, SINGA bonds would be a good asset-liability match for financial institutions such as insurers which have long dated funds that needs to be deployed as the insurance market grows further. Mr Speaker, Sir, in conclusion, I support this Bill.
Leader, would you like to move an exempted business Motion?
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