SINGAPORE: Singapore’s move to fund infrastructure projects through borrowing comes at an epochal time in global efforts to “build back better”.
Newly elected US President Joe Biden is working hard to pass a massive infrastructure package of roughly US$2.2 trillion through the United States Congress.
The move highlights the recognised need for infrastructure development in the US. It is also a robust response to the narrative that the US has lacked recent funding for infrastructure relative to other countries.
The US knows China has acted aggressively on the infrastructure front over the past decade.
China has developed the world’s largest high-speed rail (HSR) network over the last two decades, accounting for more than half of the world’s total length of HSR tracks.
This transportation network has grown by over 25,000 km over just the last 10 years, with ambitious plans to increase the coverage by more than 50 per cent over the next decade.
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PAYING FOR SUCH PROJECTS TRICKY
Funding this and other types of infrastructure developments can be tricky business.
Financing such projects is typically undertaken by governments. Infrastructure works are typically seen as public goods, which benefit a large portion of the society and yet are not economically viable for private sector funding, where recouping returns on investments can complicate how such transport networks are run for the benefits of their intended users.
Indeed, Mr Biden’s plan largely hinges on increasing the US government’s balance sheet via a substantial increase in corporate taxation rates.
This is a marked shift from a reliance on a mix of taxes on petrol and other transportation taxes to fund public projects through the Federal Aid Highway Act of 1956 and the establishment of the Highway Trust Fund, and incentives and credit assistance to boost private projects through the Transportation Infrastructure and Innovation Act of 1998.
But increasing taxes is always difficult with constituents who bear the brunt of such spending.
With the pandemic-induced economic shrinkage, paying for infrastructure expenditures whose benefits will be enjoyed by future generations is unlikely to be popular with this current generation of voters and politicians.
But this opposition predates the coronavirus downturn. Even during good times – the US economy has grown almost uninterruptedly since World War II – politicians and voters tend to allocate less than what is necessary to maintain and improve existing infrastructure network and facilities.
In more recent years, competing needs have put greater pressure on scarce fiscal resources at a time when global growth is slowing.
But the warning bells have been sounded. Renowned think tank, the US Council on Foreign Relations in early April called US infrastructure “dangerously overstretched” and “deficient”, with knock on impacts for economic competitiveness and human safety.
INFRASTRUCTURE BONDS BRIDGE THE TRANSFER
Singapore’s recently announced Singapore Government Securities (Infrastructure) bonds should be judged in this context.
In response to the chronic reluctance to inter-generational transfer, governments and other public entities have actively participated in infrastructure bonds.
In so doing, the balance sheet of the public sector can be increased without commensurate, immediate increase in taxpayers’ burden.
Infrastructure bonds are particularly useful for infrastructure projects whose cash flows will be quite stable, to support the interest payments in the future.
In this context, infrastructure bonds can be seen as an efficient way to perform inter-generational transfers, where future users of infrastructure projects provide the guarantee for future payments to bondholders.
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If the cash flows fall short of the required interest payments, the issuing government may have to increase the tax rates for future taxpayers to pay for the shortfall.
PRUDENCE IN BORROWING
The Government has announced the proceeds of this new borrowing, proposed under the Significant Infrastructure Government Loan Act, will fund MRT lines such as the Cross Island and Jurong Regional lines, and tidal walls to protect the country against rising sea levels.
The S$10 billion Deep Tunnel Sewerage System, a water superhighway to channel used water to reclamation plants, will also be one such project.
Asking future taxpayers to shoulder the additional burden seems reasonable to the extent that they benefit from the infrastructure project.
However, situations could arise where infrastructure bonds result in future interest payments associated with projects that have limited benefits. This could risk increasing prices of fundamental services, such as transportation and water, negating the benefit for the intended users: Future generations of Singaporeans.
This potential negative scenario highlights the importance of restricting which projects to fund with infrastructure bonds.
The S$5 billion cap on interest payments could place a ceiling on such an outcome, just as the S$90 billion cap on projects to be financed would restrict the types of projects to be funded through such means.
Having an efficient bond capital market is useful in reducing potential government waste in this context. Potential bondholders pay close attention to this type of issues and may shun bond issuances that are likely to run into potential shortfalls.
Such shortfalls in other countries could result in looser monetary policy, where governments would print money to pay the interest accrued to bondholders. This is a less viable option for Singapore where monetary policy is centered on managing exchange rates to ensure price stability needed for sustainable economic growth.
Instead, this would constrain the fiscal space of future Singapore Budgets, with the opportunity cost being the reduction of financing for other strategic initiatives.
DIVERSIFIED STREAMS OF GOVERNMENT REVENUES KEY
Relying solely on infrastructure bonds could also result in under-investment in such projects.
Governments therefore will have to make the difficult decision of identifying strategic – but risky – projects that must be funded by taxation, either directly by increasing tax rates or indirectly by introducing or increasing usage fees.
For now, the Singapore government seems to have set aside sufficient investments in strategic projects like the Changi Airport T4 terminal.
If these strategic projects end up being successful, future generations will benefit from lower tax rates, higher quality of life, or both.
Johan Sulaeman is a Dean’s Chair and an associate professor in the Department of Finance at the National University of Singapore (NUS) Business School. He is currently the Academic Director of the NUS MSc (Finance) Programme. The opinions expressed are those of the writer and do not represent the views and opinions of NUS.