Human Capital as Soft Infrastructure Investment – Speech by Jamus Lim

Delivered in Parliament on 10 May 2021

Mister Speaker, during the Budget 2021 and subsequent Committee of Supply debates, I had suggested that our notion of infrastructure should not be limited to a traditional understanding of physical structures and facilities. I explained how, if we wish to be a leader in the modern, knowledge-driven economy of the future, we can and should direct our development expenditures ever-more toward investments that are essentially weightless in nature, and scale back on the lumbering, massive capital projects of yesteryear.

Today, I wish to flesh out these arguments in greater detail. I will explain why investments in human capital are not only distinct from investments in labor, but also more akin to our usual definitions of infrastructure. I will also share how the returns to human capital often significantly exceed that of infrastructure, even if we are looking purely at the boost to macroeconomic growth. I then offer a simple checklist for how we can distinguish between human capital investments from recurrent expenditures.

The SINGA bill and its shortcomings

For starters, allow me again to applaud the Ministry for its willingness to relax its traditional reticence toward borrowing, to recognize that this is an opportune time to exploit historically-low interest rates to finance important, long-term investment opportunities. I sincerely believe that there is a pearl of wisdom in this oyster of insight.

I do have a number of concerns specific to the Bill itself. My first concern has to do with both the total proposed borrowing limit (of $90 billion) as well as the interest threshold amount (of $5 billion), stated in Clause 5 of the Act. While I understand that it is ultimately necessary to impose specific thresholds, I think it is worth asking how these values were arrived at. I also wonder why the interest threshold of $5 billion was chosen, which would imply an interest rate of around 5.6 percent; this strikes me as rather high, given the current interest rate environment.

Second, I note that Clause 5 of the Act also allows for moneys to be raised in foreign currency. Given that the inherent liabilities are long-term, and denominated in Singapore dollars, this exposure, if undertaken in foreign currency, subjects the debt to a nontrivial amount of currency risk. What mitigation mechanisms does the Ministry or MAS plan to deploy to limit such risks?

Third, Clause 11(2) of the Act defines “nationally significant infrastructure” to be one that has a “useful life of at least 50 years upon… completion of… the project.” Again, while I appreciate that a duration for what constitutes “significant” would ultimately have to be chosen, I would note that many existing infrastructure projects would not have qualified under this rather long time span. The Tanjong Pagar Container Terminal, for instance, began operations in 1972 and moved to Pasir Panjang in 2017,1 amounting to 46 years. The Brani Terminal dates back to 1992 and is set to be decommissioned in 2027, by which it will have operated for 36 years. Kallang Airport lasted for 19 years, and Paya Lebar Air Base, while it operated as Singapore International Airport, lasted for 28. A lower useful life threshold—of, say, 35 years— strikes me as more reasonable.

Finally, I will add that Clause 11(4) requires that the qualifying capital expenditure for every project participant must amount to at least $4 billion. For public-private partnership projects, then, this would either rule out those where the government is either unable to secure sufficient private sector buy-in—which may itself be a signal of the project’s potential viability—or when buy-in is sufficiently large, it would preclude the government being able to take on a minority stake.

What human capital is, and why it is “soft” infrastructure

But having said all that, what is “infrastructure”? The Oxford English Dictionary defines it as the “basic systems and facilities needed for the operation of a society or enterprise.”

Such systems and facilities could—and typically do—refer to roads, bridges, power, ports, or what I will refer to “hard” infrastructure. Roads get us to work, power keeps us working, and ports allow us to sell the fruits of our work to markets far and wide. There is no dispute that, when designed and implemented well, hard infrastructure— accumulated over the span of many years or decades—can yield valuable payoffs to an economy and society, and hence it is an endeavor worthy of government investment.

But it is not difficult to conceive of other systems that are critical for the successful functioning of a modern economy. We sit in a House operating under the auspices of a particularly successful realization of the Westminster system of government, without which our contracts might not be honored, our policies not delivered, or our peace not guaranteed. Our healthcare system has kept us safe from the ravages of COVID-19. And our educational system has allowed our emergence, in the words of founding father Lee Kwan Yew, “from Third World to First.” These latter two aspects—health and education—unarguably constitute systems that enable the operation of not just our, but any, 21st century economy. We often refer to the accumulation of knowledge and wellness, which makes us productive, as “human” capital,2 and the systems that deliver human capital are essentially “soft” infrastructure.3

Mr Speaker, I am not alone in insisting that infrastructure can be more broadly—and meaningfully—defined. The recently-announced American Jobs Plan—while billed as a $2 trillion infrastructure stimulus—nevertheless construes a much wider scope for what constitutes infrastructure, including the sort of soft infrastructure components I am suggesting here.4

If one is willing to apply a charitable interpretation, Clause 2 of the Bill actually already allows for SINGA to encompass soft infrastructure. Part (b)(vii) states that investments are to support or materially improve productivity, and Part (c) requires that they benefit present and future generations of Singaporeans; human capital

investments are entirely consistent with both these subclauses. The only limitation being that it constrains infrastructure to any “structure or building,” whereas I would instead allow for “structure, building, or project” instead.

Public provision of soft infrastructure

The standard concern that this Government has historically raised is that we should not be financing routine spending—the payment of our education and healthcare professionals, or funding allocated to subsidize such efforts—with long-term borrowing. But these are only recurrent expenditures when viewed from the perspective of the service delivery providers; in this sense, paying our teachers and trainers, our doctors and nurses, our scientists and researchers, are certainly a variable cost. But when viewed from that of the recipients—our students, our temporarily sick, our potential inventors—we can see how we are ultimately vesting value into the future.

Moreover, we already systematically embed development expenditures—which, by definition, are deigned to be long-lasting—into our annual fiscal budgets, a recognition that what is spent on a year-to-year basis cannot be easily disentangled from multi- year projects. By the same token, funds devoted to soft infrastructure can and should be regarded as nonrecurrent development financing, especially when the returns are expected to accrue over the very long run. My Sengkang colleague, Louis Chua, will elaborate more on why this distinction between development expenditures and long- term assets may well turn out to be an artificial construct.

Another objection to government investment in human capital, or soft infrastructure more generally, is that—being embedded in private individuals (and vesting the greatest benefits to them directly)—could mean that it is difficult to justify paying for skill and experience acquisition out of the public purse. However, there are means by which such private returns may be recovered. One approach is to offer scholarships that are contingent on incomes. I will return to this example in a bit.

Returns to hard versus soft infrastructure investment

When we think about investments, the standard approach is to compare observed returns. This is bread and butter work for the professional fund management industry, of which I have been a part. As an asset class, the expected long-term returns from global infrastructure, net of inflation, is only 2.6 percent.5 In contrast, the real returns to an additional year of schooling is in the order of 10.2 percent,6 almost four times as large.

One could argue, of course, that such returns are private returns, and do not capture the contribution of each of these factors to macroeconomic performance. That is fair enough, so let’s go ahead and compare their respective contributions to GDP growth. While estimates may differ, one recent study suggests that a one percent increase in infrastructure capital can elevate output by 7 to 10 percent, while a comparable

increase in secondary education alone could induce gains of 10 to 12 percent.7 Other credible estimates suggest even higher gains, of as much as 16 percent.8

The bottom line is straightforward: whether we focus on private or public returns, investments in soft infrastructure, such as human capital, generally offer a higher payoff compared to hard infrastructure. And my belief is that we should invest more in the type of infrastructure assets that offer a greater bang for the buck.

An assessment matrix for human capital projects

While a comprehensive checklist for evaluating the merits of any given human capital project falls well beyond the scope of this speech, I will sketch out some assessment criteria that I believe is worth considering as to whether a project be classified as soft infrastructure:

As a basic principle, the assessed returns from the project should more than pay for its original outlays. This is a remarkably low hurdle. Schooling projects that permanently raise an individual’s income—say, a full-ride scholarship to university—could translate into as much as 70 percent higher lifetime incomes.9 Such higher incomes mean higher tax returns over the course of the person’s working life, which could easily pay for the original costs of the scholarship.

Most capital projects often impose static criteria, involving cash flow analysis. The most common among these are payback period computations, which is the time needed for the project to return the original investment, in terms of cash flows generated. For hard infrastructure, these may be measured in terms of tolls or user fees; for soft infrastructure, these would be evaluated by enhanced tax revenue. Since changes in taxable income are not generally large, we can conceivably entertain payback periods of between 10 and 20 years.

Capital projects also allow for dynamic criteria, such as the net present value of a project, or its internal rate of return. Such criteria are easily adjusted to accommodate human capital projects. The main adaptation is to substitute the useful working life for a project with the average duration of a working life. In advanced economies, this duration averages 36 years.10 This would itself exceed the useful life threshold of 35 years that I outlined earlier.

 Finally, as is the case for hard infrastructure projects, all borrowing should roll in the full amount of the project’s expenditure, including interest costs and regardless of whether the disbursement is over time, into the initial borrowing issuance. This protects against unexpected changes in interest rates and the need to roll over borrowing.

Some example projects

What might some examples of soft infrastructure projects—which broadly meet the conditions set out above—be?

In my earlier speeches, I spoke about how we could finance smaller class sizes—even if on a limited basis, for languages and math—or to provide additional funding for teaching aides. These would allow us to avoid closing or merging schools, and instead direct SINGA funds toward keeping schools open, albeit with trimmed-down class sizes. Similarly, we could use SINGA to seed an initial insurance risk pool, so as to enable us to roll out redundancy insurance without delay, and without drawing down on reserves. The Workers’ Party manifesto has also suggested raising the targeted percentage of university graduates per cohort, expanding additional baseline funding for less popular schools, and expanding the number of infant care centers, especially in demographically-consistent neighborhoods. All these examples could conceivably qualify as long-term human capital accumulation projects.

Two more ideas may be considered. First, we could use SINGA to seed a fund for income-contingent scholarships: the government pays for all the costs of university or continuing education programs, perhaps subject to a very modest copayment as collateral. The recipient would then pay off the acquired debt only in the event that they secure a job, following graduation.11 Of course, some details—such as the specific major allowed to be undertaken—may need to be finessed. But the overall idea strikes me as eminently implementable.

Second, we could direct SINGA funds toward vouchers that could be applied by parents to send their children to both non-KiFAS-eligible preschools as well as charter schools, 12 which are schools allowed to develop nontraditional syllabi that deemphasize academic testing, but nevertheless set rigorous, assessable markers for inquiry, innovation, imagination, and invention. The key difference here is that these schools would be funded indirectly by vouchers, instead of direct Ministry of Education (MOE)-approved funding. The upshot of such schools is that they may even generate excellent test scores, even if this objective does not feature in their mandates.13

Investing in our children

Mr Speaker, I have, thus far, emphasized all the economic payoffs to investing in soft infrastructure. In closing, allow me to also touch on why the benefits of human capital accumulation go far beyond simply improving the productive capacity of our economy.

A nation rich in human capital is often one that is simultaneously rich in ideas and experiences, happiness and wellbeing, wisdom and understanding. These contribute far beyond the narrow scope of economics. An educated and informed populace will also be engaged participants in our political process, enhancing our democratic credibility. Creative and curious individuals also bring about diversity and novelty to

our social environment, enriching our cultural and artistic landscape. Indeed, Gary Becker—the Nobel Prize-winning economist who pioneered much of the early work on human capital—understood the importance of habits, culture, and social interactions, and the role they played in the long-run success of a nation.14

It is in this spirit—extending beyond only dollars and cents—that I am making the case for us to expand our conceptualization of SINGA infrastructure beyond structures and buildings, to encompass investment in our children, in our people, in the one resource that we truly have as a country.

On that note, Mr Speaker, I offer my support for the Bill.


1 Tan, J. (2018), “Port of Singapore,” Singapore Infopedia.

2 Becker, G.S. (1964), A Theoretical and Empirical Analysis with Special Reference to Education, Chicago: University of Chicago Press.

3 Although there is no standard definition for what constitutes soft infrastructure, practitioners and academics have generally defined these to include the health and education system, as well as institutions such as the legal and accounting systems, along with cultural attitudes (Niskanen 1991). See Niskanen, W.A. (1991), “The Soft Infrastructure of a Market Economy,” Cato Journal 11: 233–238.

4 These additional elements include job creation for essential homecare workers, agencies to oversee manufacturing competitiveness and pandemics, and incentives for electric vehicle purchases, which fall beyond the scope of the definition of soft infrastructure, as we have defined it here. But it also touches on elements that are consistent with what has been discussed, such as funding for childcare and early learning facilities and public schooling, next-generation retraining programs, and boosts to investment in R&D. See: sheet-the-american-jobs-plan/

5 This represents an average of selected longer-term forecasts, which were accurate at the time of writing. These include: Blackrock (4.2 percent nominal per annum), Goldman Sachs (7.0 percent), and J.P. Morgan (6.1 percent). The average then nets out the average 5-year global inflation rate, as forecast by the IMF, of 3.2 percent.

6 This utilizes the simple average of comparable estimates of Mincerian returns to education, for average years of schooling, globally. See Montenegro, C.E. & H.A. Patrinos (2014), “Comparable Estimates of Returns to Schooling Around the World,” Policy Research Working Paper 7020, Washington, DC: The World Bank; and Psacharopoulos, G. & H.A. Patrinos (2004), “Returns to Investment in Education: A Further Update,” Education Economics 12: 111–134.

7 Calderón, C.A., E. Moral-Benito & L. Servén (2015), “Is Infrastructure Capital Productive? A Dynamic Heterogeneous Approach,” Journal of Applied Econometrics 30: 177–198.

8 Benhabib, J. & M.M. Spiegel (1994), “The Role of Human Capital in Economic Development: Evidence from Aggregate Cross-Country Data,” Journal of Monetary Economics 34: 143–173.

9 Hershbein, B. & M.S. Kearney (2014), Major Decisions: What Graduates Earn Over Their Lifetimes, Washington, DC: Hamilton Project and Brookings Institution

10 Source:

11 Britton, J., L. van der Erve & T. Higgins (2019), “Income Contingent Student Loan Design: Lessons from Around the World,” Economics of Education Review 71: 65–82.

12 The charter school model is simple in its concept but profound in its implications. It essentially a school operating independently of the public school system—similar to private schools or home schooling—but funded by (typically) a mix of private grants and public funds. When paired with a voucher system, these public funds are disbursed not according to criteria set by the MOE, but by vouchers distributed to parents (which determine the amount of public funding the institution receives), who lend the school their vote of confidence by sending their children there. See Gill, B., P.M. Timpane,

K.E. Ross, D.J. Brewer & K. Booker (2007), Rhetoric Versus Reality: What We Know and What We Need to Know About Vouchers and Charter Schools, Santa Monica: RAND Corporation.

13 One example of this approach is the Inspired Teaching Demonstration Public Charter School, a charter school based in Washington, DC, and focused not on preparing students for test-taking but problem solving through an inequity-based curriculum.

14 Teixera, P.N. (2014), “Gary Becker’s Early Work on Human Capital—Collaborations and Distinctiveness,” IZA Journal of Labor Economics 3: 12.