Significant Infrastructure Government Loan Bill
Mr Louis Ng Kok Kwang (Nee Soon): 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.
First, can Deputy Prime Minister share what checks and balances will be put in place to assess if the loan is raised for infrastructure projects that are indeed nationally significant? For instance, while the new section 9 provides the Minister's power to raise a loan is non-delegable, can a committee be formed to deliberate and recommend if a loan should be raised for an infrastructure project?
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.
Can Deputy Prime Minister share if there are plans for climate mitigation projects? It is not only important that we adapt to climate change, but that we work to minimise its impact in the first place. Sir, notwithstanding these clarifications, I stand in support of the Bill.
Mr Heng Swee Keat (The Deputy Prime Minister and Minister for Finance): Mr Speaker, Sir, I thank, in fact, all Members who have spoken for supporting the SINGA Bill. They have also raised many suggestions. Even though Leader has just extended our time for my speech, I think if I were to go on to every single one of your suggestion, we will be here way past midnight. So, let me just cluster your suggestions around three broad questions.
First, why is the Government borrowing for nationally significant infrastructure? Second, is borrowing under SINGA a prudent approach? And third, how would the Government manage the debt issuance under SINGA?
Before I address these questions, I would first like to thank Mr Liang Eng Hwa for laying out the principles and considerations clearly. Indeed, as Mr Liang has rightfully pointed out, borrowing should be anchored by our overarching guiding values of prudence, discipline and equity. In fact, the key reason, as he pointed out, for borrowing is about intergenerational equity, a point which Prof Hoon Hian Teck also made about intergenerational equity or re-distributive justice. In fact, Prof Hoon mentioned that, for example, on climate change, the building of dykes and polders and other structures for keeping our island safe, is also a responsibility to unborn generations for which the Government is acting on their behalf.
What we are doing builds on what we have been doing in managing our reserves to make sure that while we draw on our NIRC for our recurrent spending, we are also leaving aside sums for the future generation, so that they too can manage the long term. So, this has been, in fact, the Government's approach which has been a very carefully calibrated one. So, let me now go into some details.
Today, we borrow under the Local Treasury Bills Act or LTBA and the Government Securities Act or GSA only for specific policy purposes such as for market development, meeting the investment needs of CPF, and liquidity. In fact, the majority of our borrowings, about 71%, is made up of the Special Singapore Government Securities (SSGS), which are issued primarily to support the retirement needs of Singaporeans.
All these borrowings are invested and are not spent, and the returns on our investments are able to cover the borrowing costs over the long term. This includes the higher interest rates that we give to CPF members for the monies in their CPF accounts. We manage our borrowings carefully to ensure that we have the financial resources to repay our debts.
While we used to borrow for spending in our development years, there has not been a need for us to do so since the 1990s because of strong growth and healthy revenues. Prudent management of our finances during these good years also helped us to build up our reserves.
As Mr Liang pointed out, we could therefore now count on our rainy-day fund to mount a quick and decisive response to protect the lives and livelihoods of Singaporeans when the COVID-19 crisis hit last year. We did not have to incur a single cent of debt to fund our COVID-19 response.
Our approach is different from other countries as our circumstances are different. As Ms Foo Mee Har reminded us, even during the COVID-19 crisis, some countries already had high levels of net government debt as they borrowed to fund recurrent needs. Some of these countries had to borrow even more to fund their COVID-19 response. For instance, the average net government debt amongst OECD countries rose from 65% of GDP in 2019 to 80% in 2020.
By contrast, Singapore does not have any net debt. This strong fiscal position puts us in a good position to emerge stronger from the COVID-19 crisis.
So, let me address why do we limit it to nationally significant infrastructure.
This Bill is a continuation of our careful and calibrated approach towards borrowing. As mentioned in my earlier speech, we are anticipating a hump of development expenditure as we embark on a generational upgrade of nationally significant infrastructure to improve the lives of Singaporeans. Borrowing and capitalisation of nationally significant infrastructure will help us spread out its lumpy costs, to better match the timing of the benefits to the timing of the spending. This is a fair and efficient approach. This is the result of long-term planning. We have been anticipating this need for quite some time now.
I first announced that we were studying the option of borrowing for nationally significant infrastructure about two years ago in 2019. I had also at the outset of my speech showed you this infrastructure hump that we are facing. Several Members have made comments relating about why $90 billion, why not lower it, why not increase it, why the criteria, and so on.
Let me remind all Members that we are not talking about from tomorrow, we are going to fund all development expenditure through borrowing. In fact, we are borrowing this $90 billion or we are going to borrow this $90 billion, in order to smooth out the funding needs because of this hump. Over and above that, our development expenditure will continue.
Several Members, including Mr Liang, have also asked about what is the impact on our AAA credit rating and several Members have pointed that this is the first time that we are borrowing for spending since the 1990s and it is not for a small sum; it is $90 billion. MOF and MAS have in fact engaged the three major credit rating agencies – S&P, Moody's and Fitch – to explain our approach on these borrowings. They too recognised that our approach is underpinned by key principles of prudence and sustainability. Even with the planned introduction of new borrowings to finance long-term major infrastructure, the credit rating agencies acknowledged that Singapore’s fiscal position and credit rating remain strong. This is because they understand that the Government is committed to a balanced Budget framework and to fund recurrent spending with recurrent revenue.
Having sound macro-policies – fiscal, monetary and structural – is paramount. As Ms Foo Mee Har reminded us, we cannot take our AAA rating for granted. We must be prudent in how much we borrow and what we use our borrowings for. So, let me elaborate.
One way we are exercising prudence is by limiting borrowing to infrastructure projects that have a total qualifying cost of at least $4 billion.
Mr Edward Chia, Mr Don Wee and Mr Xie Yao Quan asked about the Government's considerations in setting the project cost threshold at $4 billion and if the Government would review it in future. As explained earlier, the Government is starting off more prudently by limiting the scope of SINGA to larger projects that tend to have greater intergenerational benefits. Infrastructure projects are in most instances intended to provide a stream of services over many years, and a diverse set is needed for Singapore and many other countries. As Mr Don Wee pointed out, the Sports Hub itself, and whether it is Sports Hub or KPE, are all over a billion dollars.
It is not our intent that all types of infrastructure will be funded by borrowing. Let me emphasise. It is not our intent to fund all types of infrastructure by borrowing. Why? Because borrowing is not revenue. It must eventually be repaid by future taxpayers. If we borrow for all infrastructure projects, even the smaller ones, we will leave our children to shoulder a bigger stream of debt repayments. This would not be prudent, especially in view of our maturing economy and slower growth rates.
So, the Government will continue to plan for and build a range of infrastructure to meet the needs of our people. Such development expenditure will remain a part of our annual Budget, to be funded by the recurrent revenues that the Government has to collect. The $4 billion threshold captures major, lumpy development needs that form the upcoming "hump" above our baseline development expenditure, and are important to our national interests, as I have explained earlier on.
We are mindful that our infrastructure needs will evolve as our economy grows. Infrastructure costs may also grow with inflation. Hence, we are open to reviewing the $4 billion threshold in the future if necessary.
As to what should count as infrastructure, Assoc Prof Jamus Lim and Mr Louis Chua mentioned a few points and I want to thank Mr Murali Pillai for his thoughtful comments to these suggestions. Assoc Prof Jamus explained his proposal to expand the scope of borrowing. So, I take it that he is in full support of SINGA to fund large-scale infrastructure. But what he wants is an additional bit to further expand the scope of borrowing to include non-infrastructure spending. Let me sound a word of caution about the suggestions made by Members to borrow for other non-infrastructure needs, such as education or healthcare. And I thank Mr Derrick Goh, who has just spoken, for his warning that we should not dress all types of spending as "soft infrastructure".
In terms of spending on education, healthcare, the Government recognises the importance of spending on these needs but we should always focus on how well we spend, not how much we spend. And we should always focus on the outcome and effectiveness of our spending, not on how big a sum of money we spend.
So, we have made significant investments and ensured good outcomes. I have shown our effectiveness spending in education and health in this House before and I hope that Members will refer back to the Hansard and the charts that I have shown. This has been internationally recognised such as the World Bank Human Capital Index.
The second point is that Assoc Prof Jamus has also cited several studies, macro studies, and may not apply to Singapore. Singapore has already achieved high levels of schooling especially for our younger cohorts. Our university cohort participation rate is already at 42%, comparable to the advanced economies. More importantly, we have high employment and good outcomes.
Mr Louis Chua cited the recent US stimulus package and said it included a whole range of spending on social infrastructure. He then compared with what we are spending and suggested that actually we should be spending more. When we are looking at spending, we should be asking ourselves what do we have to spend on, what has been achieved and what other problems are we trying to fix?
So, both Assoc Prof Jamus and Mr Louis Chua's comments point to the risk, in fact, a very major risk, that if you do not draw clear lines every time expenditure items come up for debate, you would then blur the lines and the lines will keep getting blurrer. And you can argue that everything that a country needs to get itself working, to get working, would qualify. Just coin it by some nice names and call it "soft infrastructure". Is defence not soft infrastructure? Is security not soft infrastructure? Is guarding against cybersecurity not soft infrastructure? What about healthcare, education, social spending, spending to maintain social cohesion? Are those not so-called soft infrastructure too?
So, I think, please be rigorous. Let us stick to what are factors rather than to keep blurring the arguments. If you want to have higher spending on healthcare, on education, say so, and we can debate whether are we spending enough or not enough.
There is one other very significant point which I would like everyone to bear in mind. In talking about all the spending, neither Assoc Prof Jamus Lim nor Mr Louis Chua addressed the question of who is going to pay for this borrowing.
As I have said, borrowing helps you to finance but debt has to be repaid. Somebody has to repay debt.
The argument is that borrowing for recurrent expenditure will pay for itself because you will get higher returns on human capital versus infrastructure. But this has not been borne out anywhere in the world. Most developed countries that go into debt financing just end up with more debt. The hole is just getting bigger.
I want to remind Members that we spend more than 30% of our expenditure each year on MOE and MOH, and that share is expected to rise. In fact, I will talk more about this later.
So, if we borrow for one third of our recurrent spending, no matter how cost-effective they are, this would, over time, create a high debt burden for future generations.
I would also like to thank Prof Hoon Hian Teck for pointing out very clearly that we need to have the capacity to raise revenue, and this is critical for fiscal sustainability. Indeed, the credit worthiness of Singapore, the extent of credit that people are willing to recognise for Singapore and grade Singapore, depends critically on whether they think that we have a sustainable fiscal policy.
That, again, depends on how willing the Government is to maintain financial discipline and to raise taxes where it is necessary. If we do not do that, what is likely to happen is that your credit ratings will fall, the risk premium will rise. And this is going to have an effect on the entire economy – on not just Government borrowing but on corporate borrowing, and in turn, this is going to affect the jobs of our people. Because if we make ourselves a less desirable place for investments, it will come back and haunt us.
Mr Leong Mun Wai's long speech boils down to actually one argument: that we have a lot of money – more than enough – because our reserves are large and we can just spend and spend and spend. Then, he comes up with some estimates of how big our reserves are. As I have said before in this Parliament, we do not comment on the size of our reserves for the reasons I have set out in my earlier speeches. So, I shall not repeat these.
Mr Leong Mun Wai also conflated intergenerational equity for long-lived assets with intergenerational equity.
I mentioned that I would speak about the share of Government financing for just national healthcare expenditure alone. It was 35% in 2011 and 46% in 2018; and likely to rise further – so, an 11-percentage point increase in just seven years.
Mr Leong Mun Wai also claimed that the burden for paying various expenses came down to our workers. This is wrong. Let me just repeat what I said in Parliament again: about half of our workers do not pay income tax. About half of our workers do not pay income tax at all.
So, I hope that if Mr Leong Mun Wai would like to make a contribution to policy-making in this Chamber, please be rigorous. Come here with fresh insights or new facts. Bring this to the House for debate. Please do not reread and reread your old script.
Mr Saktiandi Supaat asked if we can borrow, say, during a crisis. There is no one-size-fits-all approach to a crisis. We need to take into account the nature of a crisis and be prepared to use all the tools at our disposal.
We are fortunate to have built up our reserves, which serve, among others, as a rainy day fund – as Mr Liang Eng Hwa pointed out earlier – which we can tap on in times of crisis. Indeed, with the President's concurrence, up to $53.7 billion is expected to be drawn from our past reserves over FY2020 and FY2021 to respond to the COVID-19 crisis.
Let me caution that the COVID-19 crisis is not behind us. If the global economic outlook worsens unexpectedly, we may have to take exceptional measures. If we have to draw on past reserves again to support our economy, we may consider raising cash by borrowing. Doing so would allow our assets to stay invested for the long term. But as I have said, we will be prepared to use all tools at our disposal but we have to consider this carefully.
Mr Liang Eng Hwa also asked about the update on his suggestion which he raised earlier during the Budget debate – other than SINGA, should we be prepared to borrow to finance investments that allow Singapore to emerge stronger?
Indeed, COVID-19 has accelerated structural changes in the global economy and has disrupted industries and reshaped jobs in significant ways. We are fortunate that five years ago, we started on our industry transformation and we have achieved results. In the midst of the crisis, we set up the Emerging Stronger Taskforce to look at how Singapore can emerge stronger from the crisis.
The Emerging Stronger Taskforce will be putting out its final report soon. There are many good suggestions in the report on how we can build capacity in our companies and in our people so that we can seize opportunities and emerge stronger. I will study this report carefully and discuss with MOF later on how we can fund additional investments during this period. This is an important opportunity for us to do so.
But if we do borrow for this purpose of emerging stronger, we must set some conditions; set safeguards, as Ms Foo Mee Har reminded us.
Firstly, the use of these borrowings should be tightly circumscribed to our Emerging Stronger strategies. Clear lines need to be drawn.
Secondly, we must ensure that this is a time-bound instrument, as any one-off special borrowing should be to meet the extraordinary circumstances arising from COVID-19. It is not to become a recurrent fiscal tool. So, let us stay disciplined. We will continue to monitor the economic and public health outlook closely and study this option carefully.
Ultimately, COVID-19 is sui generis. Exceptional times require exceptional measures. It is in this context that I am tabling this Bill and to consider borrowing, if necessary, to emerge stronger from this generational crisis.
Sir, let me just sum up this section by warning that while we have many needs in our society and these needs are very important, we must ensure that we use recurrent sources to fund all these recurrent needs and not to get our future generations to pay for what we enjoy today, because this is not fair. It is important that we must maintain this intergenerational equity.
Let me just move on to warn that if we lose our reputation for being fiscally prudent, investor confidence would be affected, cost of funding for everyone – the Government and our corporates – will rise and this will spill over to the real economy.
Ms Foo Mee Har, Mr Louis Ng, Mr Edward Chia and Ms Mariam Jaffar have asked about the checks and balances we need to put in place to ensure that the criteria for nationally significant infrastructure are met and borrowings are well used.
Sir, let me assure this House that there will be a rigorous multi-stage selection process to first identify potential SINGA projects which also involve third parties. This includes an evaluation through the Gateway Process and a certification by each agency's accounting officer that the criteria in SINGA are met. Let me elaborate.
First, all development projects will have to go through the Gateway Process to ensure project worthiness and cost effectiveness before construction – no different from today. Under the Gateway Process, these projects will first undergo review by MOF as well as the Development Projects Advisory Panel, or DPAP.
The DPAP includes independent third parties, such as academics and industry practitioners, with deep technical expertise. They ensure that the project meets Singapore's needs and not only today's needs, as Mr Edward Chia reminded us, but also tomorrow's. They also ensure that cost estimates are rigorous and reasonable. In fact, over the last few years, these processes have led to design improvements and generated savings of several billion dollars in total.
Thereafter, these projects will be subject to further approval by the Ministerial-level Development Planning Committee.
Finally, once these projects have been assessed to be meritorious, each agency's accounting officer, who is a senior civil servant, will be required to certify that the statutory criteria in SINGA are met, in particular, the $4 billion value project cost threshold and the 50-year useful life requirement, prior to the raising of borrowings.
Mr Murali Pillai asked about the approval process and so did Mr Louis Ng. Mr Xie Yao Quan suggested that, for prudence, perhaps we should reduce the total borrowing and reduce the interest cost.
Let me reiterate that this is to meet this hump coming up in the coming 15 years. But I want to assure Members that Parliament will continue to play an important role to ensure that our infrastructure investments are worthwhile. All infrastructure to be financed by borrowings will form part of our development expenditures to be approved through the annual Budget process. Parliament may carefully scrutinise our proposed infrastructure plans before we proceed with spending and capitalising the development expenditures. And any Committee of Supply Bill passed by Parliament has to be assented to by the elected President.
Let me now address some of the points raised by Members on how the safeguards under SINGA ensure that the borrowing is prudent and sustainable for both current and future generations.
First, I will address the limits on the amount of borrowings that can be raised before addressing the safeguards on the capitalisation of nationally significant infrastructure.
SINGA has two key safeguards to limit the amount of borrowings raised.
First, the $90 billion gross borrowing limit. Sir, let me put the $90 billion in context.
Ninety billion dollars is a sizeable limit, as Mr Xie Yao Quan pointed out. It is equivalent to about four Downtown Lines and about 20% of our GDP in 2020, at current market prices. Nevertheless, 20% of GDP is lower than the previous borrowing limits under the six Development Loan Acts, or DLAs. They averaged around 40% of GDP in the year the DLA was introduced. It is also lower than the borrowing limits in other countries. For example, Canada, which also has good credit rating, has a recurrent debt ceiling of 1.17 trillion Canadian dollars, which is about 51% of their GDP.
So, when we compare with our own past experiences and those of other countries, a gross borrowing limit of $90 billion is prudent and sustainable and can meet our needs.
Some Members, including Mr Don Wee, have asked why use an absolute limit of $90 billion instead, say, of rolling annual limits that are pegged to a percentage of GDP?
An absolute limit gives certainty to both current and future terms of Government on the amount that they can borrow to spend on nationally significant infrastructure. If we peg the limit to GDP, the limit will fluctuate as the size of the economy fluctuates over time. This will mean a lower limit during an economic downturn, like now, and constrain us from building critical infrastructure at a time when the conditions are right and could help to support the economy.
When we consider nationally significant infrastructure, we must take a longer term view. Nonetheless, I would like to assure Members, including Mr Edward Chia, Ms Foo Mee Har and Mr Louis Chua, that this $90 billion limit has taken into account future economic growth and expected inflation on the underlying development expenditures.
On the annual effective interest cost threshold of $5 billion, Mr Xie Yao Quan and Mr Don Wee asked about the considerations behind this threshold and whether it should be lower, given the low interest rates today.
As I have mentioned in my speech earlier, $5 billion caps our interest cost at around 1% of our GDP in 2020 at current market prices. This keeps the level of our interest payments sustainable and this is lower than the borrowing cost in other countries. For example, interest payment to GDP in the UK in FY2019/2020 is about 1.7%.
Mr Xie and Mr Wee are right that in the current low interest rate environment, we do not expect our interest costs to be near the $5 billion threshold even if we borrow up to the full $90 billion.
But the $5 billion cap provides some buffer when the interest rate cycle turns. And as several Members have pointed out, interest rates at some point will rise. So, we cannot expect interest rates to remain at current low levels forever and do not forget that this borrowing is not for the next year. This borrowing is for the coming 15 years.
So, I hope this will address Members' suggestion as to whether we should borrow more to take advantage of low interest rates.
Let us remind ourselves that our own interest rates are especially subject to global interest rate volatility, because our capital markets are open and monetary policy is centred on managing the exchange rate. And there were periods over the last 25 years of our history when our interest rates were much higher. For example, interest rates for 10-year Singapore Government Securities (SGS) reached 5.87% in 1998.
So, what will happen if interest rates rise? If we borrow too much from the onset, in particular for non-infrastructure expenditure, then we will have a much higher debt ceiling burden when we need to refinance our existing debts and our fiscal situation can spiral downward quickly. This usually happens in a crisis, when we can least afford it.
But if we borrow prudently to finance only critical, long-term infrastructure that bring significant benefits to Singapore, we can continue to ensure investor confidence even in a high interest rate environment. This will enable us to retain our triple A credit rating, which can anchor our interest costs.
In addition, because we are borrowing for infrastructure where the payment structure typically stretches across time, borrowing costs under SINGA would be averaged out. So, our prudent approach can therefore help us to maintain a strong fiscal position and continue borrowing to finance critical investments, even if interest rate cycles turn upwards. The interest cost threshold will keep the overall debt servicing costs in check.
Mr Edward Chia and Ms Foo Mee Har asked in the event that we are nearing the interest cost threshold, do we need to raise revenues or divest our financial assets to raise liquidity to repay some of the outstanding borrowings so as to keep within the threshold.
First, the cap on interest is on the outstanding debt. As we are ramping up infrastructure quite evenly over the next 10 to 15 years, the cap will not be binding as our initial spend is more limited. The next five years we are likely to utilise less than $30 billion but it is prudent that we size this cap early.
Second, the cap is on the effective cost across all the outstanding debt. If we issue bonds in the next few years, when rates are expected to be low, this will help reduce the overall effective interest cost even if rates go up in the future.
Hence, the cap will likely be more binding when we are closer to the $90 billion gross borrowing limit and if we are in a particularly high interest rate environment in the future. This is precisely why we need this safeguard to ensure that the Government will continue to exercise care in managing debt and debt servicing for future generations.
If interest costs rises beyond the threshold and we cannot borrow more, the government of the day can re-consider the threshold and debate in Parliament again.
I should also clarify that for outstanding loans, the Government can continue to maintain these borrowings until maturity and not have to repay the outstanding borrowings under SINGA immediately.
Some Members have also asked whether we should borrow the full $90 billion in advance, given the current low interest rates environment. Indeed, we are prepared to start borrowing for the infrastructure projects that have undergone the rigorous evaluation and review, for which approval has been given for works to begin within the next few years. This will enable us to benefit from the current low interest rates today and to better spread out the lumpy costs of our major infrastructure.
But we will not borrow for infrastructure plans that have yet to undergo evaluation and are not firm. Interest cost is not the only consideration – we have to continue to scrutinise projects rigorously. And by pacing our borrowings, it will also enable our financial markets to invest in a regular and stable way.
Ms Foo Mee Har and Mr Edward Chia asked about the safeguards. Besides limiting the amount of borrowings, the safeguards on the capitalisation and depreciation of nationally significant infrastructure assets.
We intend to depreciate the assets evenly via a straight-line depreciation method. This will ensure that each generation contributes an equal share towards the nationally significant infrastructure.
As an additional safeguard for prudence, we intend to cap the depreciation period for the assets at either 50 or 70 years, rounded down from its useful life.
This reduces the risk of future generations having to pay for an infrastructure that is becoming functionally obsolete towards the tail end of its useful life.
In addition, Mr Murali Pillai asked about potential abandonment of SINGA projects after borrowings have been raised.
I should first clarify that even the Government has started borrowing for and constructing a project, it has no incentive to abandon any meritorious projects. Because doing so comes with both tangible costs such as demolition costs that would be charged to the term of the government that abandons the project, as well as intangible costs such as reputational costs.
But as Mr Murali Pillai pointed out, there may be other scenarios where projects may be abandoned; for instance, if there is a change a government. If the new government abandons the project, it would indeed have to pay for the abortive costs, including contracts that have been signed. A few months ago, the Malaysian government decided not to proceed with the HSR project and compensated Singapore for the abortive costs in line with our bilateral agreement.
So, indeed, there is always a risk that any infrastructural projects, not just the ones that are financed by SINGA borrowings, may be aborted, due to circumstances beyond the Government’s control. And this is where we have to do our best, to put in place the measures to minimise the risks, and should these risks materialise, to have proper recourse and maintain investors’ confidence in the ability of the Singapore Government to manage the country’s finances properly and observe the rule of law.
Let me now address the points made by Members, including Mr Saktiandi Supaat, on how issuance will be managed, including green bonds.
The Monetary Authority of Singapore (MAS) as the Government’s agent will be issuing a new category of Singapore Government Securities (SGS) under SINGA. It will be named SGS (Infrastructure). To delineate this from the existing SGS issued under the GSA, we will rename the SGS issued under the GSA as SGS (Market Development).
Both categories of SGS will rank pari passu and will be priced along the same yield curve. They will also be subject to the same tax and regulatory treatments and will be made available to both institutional and retail investors. Hence, investors would see both SGS (Infrastructure) and SGS (Market Development) as equivalent substitutes.
To keep overall issuance costs well anchored, both categories of SGS will be managed holistically, as Mr Saktiandi Supaat pointed out. This ensures that the overall supply of the SGS will be calibrated to market demand.
To assess the demand for SGS each year, MAS will consider the prevailing global and domestic financial and monetary conditions, feedback from investors and the infrastructure spending needs under SINGA.
In a year, when more SGS (Infrastructure) need to be issued, MAS will accordingly reduce the issuance of SGS (Market Development), assuming market demand is constant. Like SGS (Market Development), SGS (Infrastructure) will be issued across a range of tenors. This will help to manage the overall borrowing costs across the entire yield curve.
The tenors and the overall duration of SGS (Infrastructure) would be calibrated to account for demand from investors. When market conditions are supportive, MAS will tilt the tenors for SGS (Infrastructure) towards the longer dated tenors, given that the borrowings are intended to finance infrastructure with long useful lives. Presently, the longest tenor for SGS is 30 years. We will consider issuing beyond the 30-year tenor, if there is strong market demand.
Some Members, such as Mr Don Wee and Ms Foo Mee Har, also asked if we will consider issuing SGS denominated in foreign currency.
We will not be issuing such SGS for a start. However, the SINGA provides the flexibility to issue SGS denominated in foreign currency. Together with MAS, the Government will work with the market to explore the possibilities of structuring borrowings differently over time, including SGS denominated in foreign currency, if there is demand. Should we issue such SGS in the future, we will carefully study the options to mitigate foreign exchange risk, as some Members have pointed out.
To Mr Saktiandi Supaat’s, Mr Louis Ng’s and Mr Don Wee’s query on green bonds, we will issue Green SGS (Infrastructure) for projects that meet the green criteria. As announced at Budget 2021, the Government will take the lead in issuing green bonds on selected public infrastructure projects. These green bonds are an important enabler of the Singapore Green Plan 2030. They will serve as a reference for the domestic green bond market, deepen the market liquidity for green bonds, attract green investors and anchor Singapore as the green finance hub.
We will issue up to $19 billion of green bonds over the next five years for a start. This comprises borrowings by both the Government under SINGA as well as borrowings by the Statutory Boards. For Green SGS (Infrastructure) issued under the SINGA, we expect the first issuances from FY2022 onwards.
Preliminarily, Second Party Opinion providers, which are institutions with environmental expertise to provide independent opinion on Green Bond Frameworks, have indicated that our MRT projects are likely to qualify for green issuances under SINGA, as electric passenger rail is the greenest mode of mass transportation.
The Government is working with MAS and industry partners to establish our own Green Bond Frameworks for Green SGS (Infrastructure), taking reference from international standards, as highlighted by Mr Louis Ng.
As we are only just starting out our green bond programme, we will not be stipulating a minimum percentage of green bonds under SINGA for now. Nonetheless, we thank Mr Murali Pillai for his suggestion.
As for green bonds issued by Statutory Boards, we expect NEA to issue green bonds for the Tuas Nexus project. Mr Louis Ng will be happy to know that the Tuas Nexus is one of the projects to help mitigate climate change. It maximises energy and resource recovery in the solid waste and used water treatment processes, leading to carbon savings of more than 200,000 tonnes of carbon dioxide annually. So, this is equivalent to taking 42,500 cars off the road.
Mr Saktiandi Supaat and Ms Foo Mee Har also asked how borrowings under SINGA will interact with existing borrowings by Statutory Boards.
To reiterate, borrowings under SINGA will be used to finance an upcoming generational upgrade of infrastructure which are large-scale projects which can cost up to tens of billions of dollars.
While our Statutory boards do currently borrow for infrastructure; it would be more capital efficient for such large-scale borrowings to be undertaken on Government’s balance sheet to optimise financing costs. Nonetheless, there is still a place for borrowings by Statutory Boards. We expect Statutory Boards to continue issuing bonds, including green bonds, to finance smaller scale infrastructure that do not fall within the scope of SINGA.
So, let me sum up by situating borrowing under the SINGA within our broader fiscal strategy. And in so doing, address Members’ questions about our fiscal approach.
Our fiscal strategy must remain true to our core values of prudence and stewardship. But it must also be resilient and nimble to adapting to changing times. Hence, we have employed a differentiated fiscal strategy for different kinds of expenditure.
For infrastructure needs, we will now employ borrowing as one of our financing strategies. And this is in addition to other financing strategies such as pre-saving in the Rail Infrastructure Fund and the Coastal and Flood Protection Fund.
Where appropriate, we will also consider ways to partner the private sector, as suggested by Mr Don Wee and several others, to fund infrastructure such as electrical grid upgrades to support electric vehicle charging infrastructure.
SINGA allows us to borrow to finance nationally significant infrastructure in a prudent and disciplined way. The safeguards help to ensure that the costs of borrowing remain sustainable and that these costs can be met by overall revenues without constraining our ability to pay for future needs.
Let me assure Members of this House that our fiscal position remains strong with borrowing, even if the economic outlook takes a turn for the worse.
We will also continue to remain in a net asset position. The majority of the Government borrowings will continue to be issued under the existing LTBA and GSA for non-spending purposes.
As for recurrent spending, such as healthcare and social spending, it is more sustainable to meet these growing needs through revenue that we can collect on an on-going basis, such as taxes.
Borrowing is not revenue, let me repeat that, and it must eventually be repaid by future taxpayers. Borrowing for recurrent spending will only mean that we will end up with higher and higher debt levels.
So, therefore, there will still be a need to raise the GST rate, to raise recurrent revenues for structural increases in healthcare and social spending as our population ages.
Such recurrent spending is in addition to our nationally significant infrastructure needs, which we will be financing through borrowings under SINGA.
Without borrowing, we might have needed to raise taxes even more in the next few years to fund the large upfront costs of these infrastructure, as Ms Foo Mee Har highlighted. So, borrowing helps us to spread the costs of infrastructure over generations and avoid steep increases in taxes over the coming years.
Let me address the three specific questions that Ms Foo Mee Har raised.
First, the details of how our capitalisation under SINGA will be allowed. I have mentioned that earlier on in my main speech.
Second, does the $90 billion limit take into account upgrading and maintenance cost of the infrastructure over the lifetime of infrastructure. Well, we will not be borrowing for recurrent expenditure related to nationally significant infrastructure, such as cost of repair and maintenance. So, this cost will be excluded from counting towards the $90 billion borrowing limits.
Third, Ms Foo asked, to quantify the fiscal space created from this accounting treatment, what is estimated to be the amount of taxes that would have had to be raised to fund such long-term expenditure if this was made under the current annual expense approach and does that mean that we will have more fiscal room?
I have said in my main speech earlier on that borrowing under SINGA will, I quote, "lower our annual average development expenditure over the next decade from around 5% of our GDP to 4.2% of our GDP after taking account depreciation and borrowing costs." So, in other words, on average, SINGA will create fiscal space of 0.8% of our GDP annually, in the next decade after taking into account the depreciation and borrowing costs. And this is around $4 billion in current dollars. So, put it another way, this is the amount of taxes we would have needed to raise have we not implemented SINGA, or the amount of spending that we will have to cut or not spend on SINGA.
So, to conclude, Mr Speaker, Sir, as we emerge from COVID-19, we must continue to build a better Singapore for the future. But we must remain prudent even as we do so and maintain our strong fiscal position. And to quote Ms Foo again, "the debt we accumulate must not put unfair pressure on future generations."
Borrowing for nationally significant infrastructure under SINGA will help us to achieve these goals and set Singapore up for future success. I beg to move.
