STATUTORY BOARDS TAPPING FUNDS FROM OPEN MARKET

Mrs Lim Hwee Hua asked the Minister for Finance whether the practice of statutory boards tapping the open market for funds has raised the overall cost of capital for these agencies, and whether this will lead to (i) an inflation of the cost of services to be provided to the public, and (ii) a change in the public finance structure, for example, the distribution of subsidies via the pegging of interest rates between the Central Provident Fund and the Housing and Development Board.

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, the raising of funds by statutory boards through the issue of bonds in the open market should not have any impact on the cost of services charged to the public.

Statutory boards' expenditure falls into two categories. The first category includes expenditure which is partially or fully subsidised by Government for which the cost of funds is fully borne by Government.

The second category includes expenditure which is viewed on a commercial basis. The funding needs of such expenditure are met either through loans from Government, through bank borrowings or through the issue of bonds in the open market. If they are borrowed from Government, the loans will carry assessed interest not significantly different from bond rates for similar maturities. Bank borrowings often cost more, especially for loans of longer maturities. Overall, the diversification of their borrowing portfolios should not raise their cost of capital, if properly structured.

In the past, statutory boards have tended to rely mostly on Government loans or bank borrowings as the procedures are less complicated. Nowadays, they are encouraged to issue bonds to fund their programmes so that their costs of funds are properly priced. Such bond issues also provide additional outlets for the investment of domestic savings and contribute towards the development of our capital market.

In the specific case of the link between HDB's borrowing costs and its mortgage rates, I should point out that the issue of bonds by HDB has no impact on the interest rates for the concessionary mortgage loans, which are pegged at 0.1% above the CPF Ordinary Account interest rate. The bonds issued under the HDB Medium Term Note Programme are not for financing subsidised mortgage loans, but for financing HDB's development programmes and operational requirements. The bonds replace some of the HDB's loans provided to HDB by the Government at an interest rate of 2% above the CPF rate.

There are no plans at present to change the current peg between the CPF Ordinary Account interest rate and the HDB concessionary mortgage rate. The source of funds for the mortgage loans will continue to be from the Government.

Mrs Lim Hwee Hua (Marine Parade): I would like to ask the Minister to confirm that the cost of raising capital via bonds for statutory boards is actually lower than that from direct borrowings from the banks.

Dr Richard Hu Tsu Tau: So far, that has been the case. I will give an example. For JTC, its long-term borrowing cost has averaged about 5.5% prior to bond issues in the debt market. But these bond issues have averaged about 5%. I think so long as JTC continues to get better rates for their bonds than from bank borrowings, this is something which is preferred.