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The Straits Times (9 Apr 2021): Right-funding for long-term infrastructure

09 Apr 2021

The Straits Times says: Right-funding for long-term infrastructure (Editorial)

Since 2018, the Government has been exploring the option of borrowing to fund large long-term infrastructure projects. It has now proposed a Significant Infrastructure Government Loan Act (Singa) which sets out the framework for such borrowing. This is a timely initiative and a necessary departure from the past practice of funding infrastructure development from recurrent revenues for at least three reasons.

First, with interest rates at close to historic lows, and given Singapore's AAA rating, this is an opportune time for the Government to borrow at favourable rates. Second, infrastructure spending needs are likely to grow over the coming decade, particularly with the expansion of the rail network, expenditure on climate change adaptation, other green projects and major highways. With social spending also likely to rise, all infrastructure spending cannot be funded solely from recurrent revenues without significant tax increases - unlike in the 1990s, which were mostly high-growth years and social spending needs were not as pressing as they are now.

Third, it is only fair that the costs of long-term projects which will benefit more than one generation be borne by both current and future generations. Long-term borrowing will enable the burden of costs to be shared more equitably. Drawdowns of reserves, if needed, will also be spread across generations and the constitutional requirement of the balancing of the Budget over each term of the government can be met.

The Singa framework also has built-in safeguards. While many governments borrow for a variety of fiscal needs, borrowing under Singa will only be for nationally significant, multi-year infrastructure projects, and will not be used for recurrent spending. Borrowings will be subject to a gross limit of $90 billion and annual interest payments will be capped at $5 billion to avoid over-burdening future generations. These safeguards will ensure that the additional borrowings will not compromise Singapore's sovereign credit rating. Rating agencies have already sounded votes of confidence. For example, S&P Global Ratings has indicated that Singapore's "exceptionally high public sector net asset position is more than sufficient to absorb these borrowings", while Moody's expects that the ratio of interest payments to revenue will remain "very strong".

The Singapore Government already issues securities to help develop the bond market, the proceeds of which are not used for spending. The infrastructure bonds, including green bonds, which will also be Government-backed, will add to this pool. This means that total bond issuance will need to be holistically managed to respond to market demand. The end result: a deeper and more varied Singapore dollar bond market with more opportunities for long-term investors.