Second Reading Speech by Deputy Prime Minister, and Minister for Finance, Mr Heng Swee Keat, on the Significant Infrastructure Government Loan Bill 2021, at The Parliament, 10 May 202110 May 2021
Upcoming hump in development expenditure
A1. Mr Speaker, I beg to move, “That the Bill be now read a second time”.
A2. Sir, let me first set the context behind this Bill. To do so, may I ask the Clerk to distribute the Handout, please? Members may also access this Handout through the SG PARL MP mobile App.
A3. Now Mr 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%.
A4. This expenditure is over and above infrastructural investments that we will continue to make, in areas like building more healthcare and education facilities.
a. 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 also 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.
b. 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.
c. 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.
A6. 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.
A7. Borrowing in this context is also efficient.
a. First, with Singapore’s AAA rating, we are likely able to tap the debt market at favourable interest rates.
b. 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.
A8. 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.
a. Singapore launched our first Development Plan in 1961, an ambitious $871 million plan to kick-start industrialisation and economic development. We borrowed from the World Bank and Asian Development Bank, and paid these debts back steadily, and on time.
b. 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.
A10. 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.
A11. Hence, we will not have the same buoyant revenues as before to pay for large infrastructure expenditure upfront. Instead, we will reactivate Government borrowing.
A12. Our approach on borrowing should remain prudent and disciplined.
a. 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.
b. 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 limit and interest limits.
A14. 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.
B. SAFEGUARDS IN THE SIGNIFICANT INFRASTRUCTURE GOVERNMENT LOAN BILL
B1. Mr Speaker, I will now explain how we have included these safeguards in the Bill, which will apply in addition to the Reserves Protection Framework.
Qualifying criteria for SINGA projects
B2. The earlier Development Loan Acts in the 1960s to the 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.
B3. 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.
B4. In addition, under the SINGA Bill, nationally significant infrastructure projects must satisfy four requirements:
a. One, it must be major in size;
b. Two, it must be important to Singapore’s national interests and benefit the general public;
c. Three, it must last multiple generations; and
d. Four, it must be owned by the Government.
B5. First, nationally significant projects will have to cost at least $4 billion. This is set out in Clause 11(5a).
a. Nationally significant infrastructure projects tend to be big-ticket items as they are major and complex in nature.
b. The $4 billion threshold will capture major, lumpy development needs that form the upcoming "hump" above our baseline development expenditure.
c. It will also exclude smaller-scale infrastructure, such as schools and polyclinics. Such smaller scale infrastructure make up the base of our annual development expenditure, and should continue to be funded from taxes and other revenues.
a. First, recurrent expenditure related to the nationally significant infrastructure, such as costs of repair and maintenance, and purchase of vehicles, is excluded.
b. Second, the cost of acquiring land is excluded as well.
c. 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.
i. 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 other MRT lines, existing and planned.
ii. Now, 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 targeted 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.
iii. 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.
B7. 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”.
a. New MRT lines will qualify, because they enhance liveability, promote economic activity by improving connectivity, and are the greenest mode of transport in the long run.B8. 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.
a. This list is non-exhaustive. This is because we can never know today, what we may need in the future.
b. 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.
c. In order to adhere to the spirit of this thinking without trying to predict too far into the future, we have the safeguards that I have mentioned earlier – to ensure that the Government will use this carefully.
B9. 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.
a. This ensures that the infrastructure projects will benefit more than one generation of citizens.B10. To be clear, the useful life of an infrastructure is not necessarily the same as its physical life. The useful 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.
B11. We will use the useful life of the infrastructure to determine the depreciation period of the capitalised assets.
a. This is fair as it ensures that depreciation costs are spread only across generations who will benefit from the infrastructure.Ownership by Government
B12. 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.
a. 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.
b. To give an example, the North-South Corridor will qualify under the SINGA, because it is an asset owned by the Government, and is controlled by another entity, namely the Land Transport Authority, on behalf of the Government.
B13. 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 borrows is equitable and sustainable. This is to ensure that future generations are not saddled with a high debt burden.
B14. Clause 5 imposes two restrictions, namely:
a. A gross borrowing limit; and
b. An annual effective interest cost threshold.
Gross borrowing limit of $90 billion
B16. The gross borrowing limit is set at $90 billion under the Bill.
a. This sum reflects the projected pipeline of nationally significant infrastructure over the next 15 years, after adjusting for inflation.
b. $90 billion 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 the 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.
a. 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.
b. 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.
c. 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.
d. 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.
a. This is because there is no corresponding spending on and capitalisation of nationally significant infrastructure.
b. Allowing for refinancing gives the Government of-the-day the flexibility to manage borrowing costs efficiently across interest rate cycles.
c. For instance, the Government may issue bonds across a range of tenors, and refinance when the bonds mature.
Annual effective interest cost threshold of $5 billion
B20. The second restriction is an effective interest cost threshold of $5 billion per annum.
a. $5 billion interest against the $90 billion cap works out to be an effective interest rate of about 5.5%.
b. This threshold ensures we limit our borrowings when interest rates are very high, as interest costs will have to be borne by future generations.
B22. Allow me to illustrate how the threshold will work:
a. The recent 30-year SGS that was auctioned in January 2021 had a cut-off yield of 1.40%. 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 2 years, and this was in the aftermath of the Global Financial Crisis from 2011 to 2012.
b. 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.
c. 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.
d. 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 the SINGA to $50 billion, notwithstanding the gross borrowing limit of $90 billion.
a. 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.
b. 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.
c. 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.
d. 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.
B24. As with all its fiscal expenditure, the Government will be transparent in reporting the use of borrowings to finance nationally significant infrastructure.
a. 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.
b. Additionally, we will submit a statement of assets financed under SINGA to the President annually to ensure accountability.
C1. Sir, let me now explain how this Bill will impact our Current Reserves and annual Budget balance.
a. 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.
b. 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 the SINGA.
c. In other words, the development cost of major, long-term infrastructure will be:
i. financed using borrowings raised under the SINGA;
ii. capitalised as assets; and
iii. depreciated over the useful life of the infrastructure.
d. 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.
i. As such, development expenditure financed by SINGA will affect the Current Reserves differently compared to regular development expenditure.
ii. The budget presentation will reflect this treatment.
e. 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.
f. 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.
a. 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. And assuming equal progress in every year, this would mean expenditure of $1.4 billion per year.
b. Under the 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.
c. 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.
C4. 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.
C5. We had sought President’s in-principle support in February this year for 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 President’s assent to this Bill. Under Article 144 of our Constitution, 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.
D. TWO FORMS OF BORROWING
D1. Mr 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.
D2. 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.
D3. All borrowing under the LTBA and GSA are invested and cannot be spent.
a. 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.
b. 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.
a. First, borrowings to finance spending on nationally significant infrastructure under the SINGA; and
b. 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.
E1. Mr Speaker, Sir, let me now conclude.
E2. In 1965, shortly after Singapore became an independent nation, Mr Lee Kuan Yew said, “Over 100 years ago, this was a mudflat, swamp. Today this is a modern city. 10 years from now, this will be a metropolis. Never fear”.
E3. Since independence, infrastructure has played a major role in Singapore’s remarkable physical transformation from mudflat to metropolis.
a. We built a world-class airport that has made us the open, globally-connected city we are today.
b. 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.
c. 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.
a. We are building a sewerage system that helps us recycle every drop of water in a never-ending loop.
b. We will bring green and efficient transport options closer to more Singaporeans.
c. We will build coastal protection infrastructure to protect our coasts from rising sea levels caused by climate change.
d. 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.
a. It provides an additional fiscal tool to continue to build Singapore for the future.
b. It adheres to our prudent fiscal approach, by ensuring that we do not risk borrowing beyond our means.
c. After all, all debt has to be paid for.
d. 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.
a. We are not borrowing to spend on expenditures that will be consumed quickly.
b. 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.
a. In the long journey of nation-building, each generation of Singaporeans are relay runners.
b. 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.
c. 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.