SINGAPORE - A new Bill introduced on Monday (April 5) will pave the way for the Government to pay for major national infrastructure projects through borrowing, something that has not been done since the 1990s.
The proposed Significant Infrastructure Government Loan Act (Singa) will allow the Government to borrow up to $90 billion to pay for infrastructure that will last for at least 50 years. This means the cost will be spread out over many years, with each generation that benefits bearing part of it.
Said Deputy Prime Minister Heng Swee Keat in a Facebook post shortly after he tabled the draft law, which will be debated when Parliament sits next month: "Singa will allow the Government to borrow to finance nationally significant infrastructure that is critical for our long-term development.
"We are making significant investments in the coming years - such as the Cross Island and Jurong Region MRT lines, and the Deep Tunnel Sewerage System.
"Borrowing for nationally significant infrastructure will spread this lumpy expenditure across the generations who will benefit. This is equitable across generations."
Singapore last borrowed for infrastructure in the 1970s and 1980s, to pay for the large upfront costs of building Changi Airport as well as the Republic's first MRT lines. By the 1990s, with the economy growing rapidly, the Government paid for infrastructure in full from its revenue.
The country now faces another hump in its development spending needs, with plans for new rail lines and coastal protection measures against rising sea levels.
This comes amid a tighter fiscal situation, exacerbated by the Covid-19 pandemic. Singapore is expected to record a Budget deficit of $64.9 billion in the 2020 financial year, and is expecting to record another deficit of $11 billion in the 2021 financial year.
During his Budget statement in February, Mr Heng mooted the idea of borrowing to fund major infrastructure projects, explaining that it made sense with interest rates close to zero.
He added that it was also a fair approach, as it would allow costs to be spread out among the generations of people who will benefit from the infrastructure.
He said safeguards will be in place so that the money borrowed is used sustainably and responsibly.
The draft law specifies the types of projects that qualify, and limits the amount that can be borrowed.
First, only certain "nationally significant infrastructure" can be funded under the law. This is infrastructure that supports national productivity or Singapore's economic, environmental or social sustainability. Examples include major highways, structures to supply, recover and treat water, and structures - such as sea walls, groynes, dykes, floodgates, barrages and coastal pumping stations - to mitigate risks from coastal hazards.
Such infrastructure must last for at least 50 years so as to benefit multiple generations. It must also be owned by the Government and be controlled by it, or on its behalf.
Another criterion is that the expected cost of the infrastructure project should be at least $4 billion.
Second, to avoid onerous financing costs for future generations, the Government can raise only up to $90 billion of loans in total under the proposed law. This comes up to slightly under 20 per cent of today's gross domestic product.
The Ministry of Finance (MOF) said the amount is calculated based on expected expenditure needed to develop nationally significant infrastructure over the next 15 years.
There is also an annual interest threshold of $5 billion. Once it is breached, the Government will not be able to raise any more loans under the proposed law in the next financial year.
These limits can be changed only by passing a new Bill in Parliament to amend Singa, said MOF, adding that this is to hold the Government of the day accountable if it wants to borrow beyond the prescribed limits.
For a start, the bulk of the borrowing will go to funding the new Cross Island and Jurong Region MRT lines.
In his Facebook post, Mr Heng said borrowing allows the Government to tap the debt market for Singapore's long-term development. "With Singapore's AAA rating and the current market environment, we are likely to be able to do this at favourable interest rates," he said.
"Nonetheless, borrowings must be done responsibly and sustainably. After all, today's debt will be paid for by tomorrow's generation."
Thus, he said, the Bill includes strict safeguards on the projects that qualify for borrowing and the amounts that can be borrowed.
OCBC economist Selina Ling reckons the absolute amount cap of $90 billion on borrowing will serve as an additional safeguard against any potentially profligate debt financing, and believes the move will not affect Singapore's sovereign credit rating.
"There are clear safeguards for the Singa programme with very well-defined and tightly managed criteria for what qualifies for Singa," she said. "In particular, any amendments to the gross limit and the annual interest threshold would require passing a new Bill, so this should give some reassurance to the market that Singapore's fiscal position and financing framework remain robust."