SINGAPORE — The Government’s recent decision to fund large-scale infrastructure projects through borrowing is a “deviation” from the past, though not entirely new, analysts said.

Last Monday (Feb 18), Finance Minister Heng Swee Keat announced that the government-owned company Changi Airport Group will be taking up loans to finance the construction of Changi East development, which includes the airport’s fifth terminal.

He also said that the Government will provide a guarantee for these borrowings, with the Singapore president’s agreement, to lower financing costs.

In his Budget debate round-up speech on Thursday (Feb 28), he elaborated on the thinking behind this decision, saying that borrowing can be a fair and efficient tool to finance and spread out these costs, instead of raising taxes sharply to fund them.

TODAY takes a look at how Singapore has borrowed over the years, and what is new today.

THE EARLY YEARS

The Singapore Government borrowed to build the first MRT lines. It also took up loans to fund the development of Changi Airport, which was built and operated by the Government back in the 1980s.

Mr Heng told The Straits Times in an interview last year that in these early years of development, Singapore borrowed from a variety of sources including the World Bank and the Asian Development Bank.

But the Government stopped borrowing as the economy grew.

Based on figures from the Department of Statistics, Singapore’s public external debt was S$937 million in 1980, but dropped to zero in 1995 and has remained at that level since then. 

THE 1990s

Since the late 1990s, some public agencies have issued bonds on the financial markets to partly finance infrastructure projects.

Statutory boards such as the Housing and Development Board, the Land Transport Authority and national water agency PUB are among them, issuing bonds periodically to build housing, rail and water infrastructure.

Investors who bought these bonds included banks, insurance companies and fund managers.

These bonds are not guaranteed by the Government, the Ministry of Finance (MOF) said.

TODAY’S INFRASTRUCTURE NEEDS

In the Budget last year, Mr Heng raised the possibility of borrowing to fund Singapore’s upcoming infrastructure needs.

The day after he delivered the Budget speech then, he told The Straits Times that just as it was in the early years of development, Singapore was facing another major spike in infrastructure spending.

In this year’s Budget, he announced that the Government indeed plans to proceed with borrowing, to fund the development of Changi East, and that it will also provide a guarantee for the borrowings.

Mr Heng said the government guarantee “allows us to tap the strength of the Government’s balance sheet to back this strategic investment. This lowers the cost of borrowing”.

With a triple-A credit rating, having the Singapore Government’s reserves as a guarantee would mean that lenders would be more willing to provide funds to Changi Airport Group and possibly expect a lower interest rate, thereby lowering its financing costs.

WHY BORROW IF THERE IS A SURPLUS?

Senior economist Irvin Seah from DBS bank noted that infrastructure projects in recent years have been funded through existing budget surpluses.

For the Government to “deviate” from this and start borrowing again, it likely means that the amount it needs to raise to fund upcoming projects is not only larger, but the duration longer, he said.

Besides Changi East, other major public projects in the pipeline include the MRT network's Cross Island Line, the rejuvenation of public housing estates and infrastructure to deal with climate change, the MOF said.

In his round-up speech on Thursday, Mr Heng said: “As these projects have lumpy upfront costs and benefits that span many generations, borrowing can be a fair and efficient tool to finance and spread out these costs, instead of raising taxes sharply to fund them.”

Workers’ Party chief Pritam Singh asked how borrowing will impact revenues available for future recurrent spending.

Mr Heng replied: “Borrowing does not create new revenues for recurrent spending. It merely converts a concentrated lump of spending in a few years into a smoother stream of loan repayment with interest.”

Even though this term of government is expected to have a budget surplus of about S$19 billion for the financial year ending March 31, analysts said that financing major infrastructure projects through borrowing is more equitable across generations.

Given that large infrastructure projects have a long construction period and a long shelf-life, there is an “intergenerational responsibility” to spread the cost instead of funding it up front, OCBC bank's economist Selena Ling said.

For example, she pointed out that the Merdeka Generation Package is paid off in “one shot” because it is catered only for Singaporeans born in the 1950s.

“It’s a different philosophy for what (the Government) sees as recurrent social spending versus hard assets like infrastructure. After you build the MRT, it can serve for the next 20, 30 years,” she added.

Economist Barnabas Gan from United Overseas Bank also said that the long shelf-life of infrastructure projects means that citizens can derive a high utility from it over a long period of time.

“When cost is being spread over many years, the generations that use it share the cost. Compared to frontloading the cost within the first and second year (of the project), the economy in general bear the brunt of cost, but the rest of the future generations get to enjoy with little or no cost,” Mr Gan said.

Besides intergenerational equity, Mr Seah said that a secondary reason for opting to borrow could be because there might be fewer recurring revenue sources in the Government’s budget to fund infrastructure projects, as a greater amount of recurring expenditure is being funnelled towards social welfare programmes such as healthcare and education.