SINGAPORE (Feb 26): The government’s spending on healthcare and education is in a steep secular uptrend as it copes with an ageing society and technological disruption. But its spending on transport is set to leapfrog ahead of both these expenditure items in fiscal year (FY) 2018 as plans to expand Singapore’s airport and build new rail links to Malaysia are unfurled.
Meanwhile, the government is proposing that the statutory boards and government-owned companies that will be involved in developing and building the new transport infrastructure tap the bond market to fund these rising costs. “This will help spread the cost of certain large investments over more years,” Finance Minister Heng Swee Keat said in his speech on Feb 19.
For FY2018, the government is budgeting for a 52.6% rise in spending on transport to $13.7 billion. That will put transport spending ahead of spending on education, which is set to rise 0.8% to $12.8 billion, and spending on healthcare, which is budgeted to decline 3% to $10.2 billion. The only expenditure item that will be larger than transport is defence, which will rise 4.2% to $14.8 billion.
According to the Ministry of Finance, about $11.9 billion of the transport budget relates to development spending. This amount, which excludes land-related expenses, is 61.4% higher than what was spent last year. Budgeted operating expenditure accounts for the remaining $1.8 billion, about 12.3% more than in the previous year.
A significant portion of the higher spending on transport will go towards developing key transport links such as the Kuala Lumpur-Singapore High Speed Rail and the Johor Bahru-Singapore Rapid Transit System Link, which are expected to be completed by 2026 and 2022, respectively. Funds will also go towards the mega Changi Airport Terminal 5, expected to be completed around 2030, and the Tuas mega port, slated to start operations progressively from 2021.
“These infrastructure projects, once completed, will generate economic returns over many years,” Heng said. “The borrowing arrangements for these projects will thus help distribute the share of funding more equitably across generations.” He added that the Land Transport Authority (LTA) would look at borrowing for the rail links, while Changi Airport Group looks at borrowing for Terminal 5.
“To help lower the financing cost, the government will consider providing guarantees for some of these long-term borrowings for critical national infrastructure,” the minister added, noting that what was likely to be bonds could be backed by the national reserves. “This is another way to use the strength of our reserves to back our infrastructure projects, without directly drawing on the reserves. The reserves can then remain invested to generate returns.”
Funding for the future
It is not currently clear how much Terminal 5 will cost. Some observers expect it to run into the tens of billions of dollars, given that the facility will be larger than the first three terminals combined, and will more than double Changi Airport’s current passenger handling capacity. In 2015, the government had set up the Changi Airport Development Fund to finance the building of the new terminal. The fund currently has $4 billion in it, which is unlikely to be enough to see Terminal 5 built. For perspective, Jewel Changi Airport, the mixed development rising in front of Terminal 1, is costing about $1.7 billion to build.
Where will the rest of the money for the new terminal come from? One suggestion is that additional charges be levied on passengers and airlines at Changi to help pay for the airport’s expansion. Singapore would not be setting a precedent. In 2016, Hong Kong started collecting an Airport Construction Fee of between HK$70 and HK$180 from each passenger as part of the financing plan for the city’s third runway, which is to be completed in 2023.
Terence Fan, assistant professor of Strategic Management at the Lee Kong Chian School of Business, Singapore Management University, says Hong Kong’s Airport Authority officials considered the tax on passengers who use the airport to be the “fairest” way to raise the funds. A government-subsidised runway would have meant that local taxpayers were “footing the bill for overseas passengers”, as airport officials said at the time. This funding model has its share of critics, though. Notably, the International Air Transport Association has objected to such “pre-financing” of the facilities. IATA director general and CEO Alexandre de Juniac recently said: “We shouldn’t pay first without having the infrastructure ready to be operated and used by airlines.”
Then, there is the larger question of the positive economic “externalities” that a world-class airport would bring to all Singaporeans, even the ones who never actually use the facility. An entrepôt hub such as Singapore would naturally benefit from such investment in transport infrastructure. Ultimately, Changi’s Terminal 5 and the upcoming Tuas Terminal, expected to be the world’s largest container terminal, are designed to secure Singapore’s position as a hub for transport and trade. “Would we want to underinvest and risk the loss of that hub status?” asks Fan.
So, is Heng’s proposal of tapping the bond market a better and fairer means of funding new transport infrastructure? Certainly, the proposed financing model has created a wider buzz about these infrastructure projects, Fan notes. “It adds more scrutiny to the investment merits and efficiency [of the projects].”
Analysts also see the infrastructure bonds as a welcome addition to the existing stable of Singapore Government Bonds and Statutory Board bonds. “Investors with long-term Singapore dollar liabilities are likely to be keen to subscribe,” according to a Feb 21 report by UOB Group.
The bonds may not necessarily be restricted to funding the so-called marquee projects. In the pipeline are several redevelopment projects across Singapore, such as the Punggol Digital District and Woodlands North Coast, the report adds. “Even upgrades to existing infrastructure may also be included and thereby ensure a continuous supply of infrastructure bonds,” it says. “Given the proposed explicit government guarantee, we can expect infrastructure bonds to trade at a narrower yield spread than existing statutory board bonds.”
Domestic fixes
Some observers suggest that the FY2018 transport budget has risen steeply because there is an urgent need to fix the domestic transport network and services, following the severe breakdowns and ensuing public outcry over the last few years. Moreover, the government now owns all public rail transport assets, under the new rail financing framework introduced in 2010.
Earlier this month, before the Budget speech, it was announced that LTA would buy all the rail operating assets from SBS Transit, which comprise the North-East MRT line and the Sengkang and Punggol LRT lines, for about $30.8 million. In 2016, it was announced that LTA would take over all operating assets from SMRT — comprising the North-South, East-West and Circle MRT lines as well as the Bukit Panjang LRT line — for $1.06 billion. The operators — SMRT Corp and SBS Transit — would pay LTA a licence charge for the right to run the revenue services. Monies collected from the licence charge are then paid into a Railway Sinking Fund to finance the expansion, replacement and upgrading of the operating assets, which include the trains and the signalling and power systems.
Now, the government is setting up a Rail Infrastructure Fund, with an initial $5 billion injection, to be topped up in the years ahead, “to save up for major rail lines ahead”. There are plans to expand the rail network by more than 100km. Last October, as the Public Transport Council was reviewing fare adjustments, an annual exercise, council chairman Richard Magnus had highlighted that new rail infrastructure was set to cost $20 billion, over the next five years. That was in addition to $4 billion to be spent on renewing, upgrading and expanding the existing rail assets, as well as another $4 billion on bus contracting subsidies.
Whatever the case, the expanded transport budget shows an emphasis on the public transport system that was not there before, says transport consultant Vincent Loh. In his view, it is not just about fixing the network and service issues that have occurred. Rather, it is more important that the government looks ahead and provides for fresh initiatives that will improve the transport sector’s service levels.
Loh believes that once Singapore has fixed its domestic network issues, regained optimum operational efficiency and mastered the latest industry technology, it will put the country in a good position to participate in transport infrastructure expansion projects outside of Singapore. “The Budget actually paves the way for that.”
