SINGA will lower hump in development expenditure from 5% of GDP annually to 4.2%

THE Significant Infrastructure Government Loan Act (SINGA) will help to smoothen the upcoming hump in Singapore's development expenditure, lowering it from around 5 per cent of gross domestic product (GDP) annually to 4.2 per cent, Deputy Prime Minister and Minister for Finance Heng Swee Keat said in the Bill's second reading debate in Parliament on Monday.

This estimate applies to the next decade, and is after taking into account depreciation and borrowing costs, he said.

In the next 15 years, major projects such as new MRT lines, the deep tunnel sewerage system, and coastal defences mean that the government expects development expenditure to be around 5 per cent of GDP annually, compared to the baseline or average development expenditure of 3.7 per cent.

SINGA introduces a new form of government borrowing, to fund such major long-term infrastructure projects. It will change the way that these development costs show up in the government's annual budgets.

Currently, the development costs of infrastructure are financed using revenues that accrue to current reserves, and are fully expensed upfront - such that the annual budget balance is reduced by the full development costs paid in that year.

With SINGA, the development costs of qualifying projects will be financed using borrowing, capitalised as assets, and depreciated over the useful life of the infrastructure. This depreciation, as well as borrowing costs, will affect current reserves over the assets' useful life.

Singapore previously borrowed for infrastructure in the 1960s to 1980s. The choice to "reactivate government borrowing" now is in light of Singapore's mature economy and slower economic growth, which mean that the country "will not have the same buoyant revenues as before to pay for large infrastructure expenditure upfront".

Mr Heng gave a recap of safeguards under SINGA. The Act has a gross borrowing limit of S$90 billion, reflecting the projected pipeline of nationally significant infrastructure over the next 15 years, after adjusting for inflation.

This is about a fifth of today's annual GDP at current market prices, lower than previous borrowing limits - which averaged 40 per cent of GDP - under the Development Loan Acts of past decades. "It is thus a reasonable figure given our more mature economy," said Mr Heng.

There is also an effective interest cost threshold of S$5 billion per annum, working out to an effective interest rate of about 5.5 per cent.

Unlike the earlier Development Loan Acts, which did not set out criteria for qualifying development expenditure, SINGA also sets out four requirements for projects.

First, these must be major in size, costing at least S$4 billion. Different phases or components that are linked physically or operationally - stations on the same MRT line, say, or coastal defences - may jointly count towards this threshold. But projects that can operate independently - individual hospitals, for example - cannot be be bundled together to meet this.

Second, the project must be important to Singapore's national interests and benefit the general public; third, it must have a useful life of at least 50 years, so that it spans multiple generations; and fourth, it must be owned by the government.

Mr Heng stressed that SINGA is "a new form of government borrowing" for the sake of financing spending, and is distinct from existing government borrowings under the Local Treasury Bills Act (LTBA) and Government Securities Act (GSA), which are for specific non-spending purposes such as for market development, meeting Central Provident Fund investment needs, and liquidity.

"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," he said. "To address these misperceptions, we intend to clearly delineate the two types of borrowing in legislation."

The government intends to merge the LTBA and GSA into a single Act, with this merger Bill to be tabled in Parliament in the coming months.

SINGA also repeals the older Development Loan Acts. "This makes it clear that borrowing for developmental purposes going forward can only take place under the new safeguards that are imposed under SINGA," said Mr Heng.