Governance of a City-State
In managing business and living costs, let ‘s also recalibrate the rate of change

Budget 2014 can be lauded for achieving its social aims, but it has completely ignored a very important issue facing all Singaporeans and companies, not just SMEs. This is the high cost of living and doing business in Singapore.

The government did the right thing by sticking to its productivity push as it is central to our broader economic restructuring efforts. I fully agree and support that in the long term, our economy must be supported by productivity driven growth and not one that relies on cheap input factors like cheap labour.

However, there are two issues facing companies. One is the topline growth of revenue and business, which I believe will be best tackled by all the productivity and innovation initiatives like the PIC and PIC+ and the other good schemes announced in Budget 2014. The second and immediate issue is one of cost of doing business in Singapore. We are at a critical stage and I feel the government has underestimated the impact of high business costs on our future economy.

In fact, this year companies are facing a triple whammy when it comes to doing business in Singapore:

a. Business costs have gone up, especially rentals and utilities and some others – transportation cost for example

b. Cost of labour is going up, including the additional CPF they have to bear

c. Shortage of workers as we close the tap on allowing foreign workers, even if employers are willing to pay more to hire them

We are just trying to do too many things too fast and this is hurting many companies. The key issue of cost is not just a concern for SMEs, it is also a big concern for larger companies. I have met with the top management of some large MNCs here and all of them have expressed their serious concerns about the unrelenting increase of the cost of doing business coupled with the unavailability of workers. Some have warned me that relocation is something on their minds.

While MNCs are more mobile, SMEs have less choice and will have to try to stay and fight for their survival. But I urge the government not to take this for granted as we have a huge threat next door. Recently I made a visit to a few industrial parks in Iskandar Malaysia and I was shocked to see many factories already in operation and many more coming up. And companies operating in these Iskandar industrial parks are not just SMEs but also some MNCs. If we are not careful and as more SMEs are forced to move out to Iskandar, which seems to be a saviour for many of our Singapore companies, some MNCs may also follow them to be near their suppliers and subcontractors, which are mainly our SMEs. The exodus may be larger that we imagine, and so we should not ignore the potential impact to our economy as jobs losses may become a serious national problem. We risk hollowing our economy in the future and I would like to sound an alarm that we are close to the tipping point of this happening.

I have heard this argument from some government agencies that they don’t mind letting some of our SMEs shut down and relocate as this would free up workers for the sectors the government would like to focus on. I say that this is too simplistic an assumption because our SMEs hire two-thirds of the work force and moreover, many of our SMEs hire the older workers which large MNCs don’t want to hire. A good number of these workers will face difficulties fitting into the sectors the government desires. I caution the government from doing too much of cherry picking of sectors and companies as we don’t know which companies will remain rooted to Singapore and which may become long term winners.

I recently spoke with the CEO of a Singapore-based company which operates the world’s 5th or 6th largest coffee processing plant in Iskandar and he mentioned that the lease he has to pay to JTC for one of his plants here is too high. In Iskandar, his company owns a freehold factory that is able to employ people, including foreign labour, a lot easier than here in Singapore. It is a pity, because the factory is fully automated and the type we would like to be based in Singapore. I don’t think we can ever convince such companies to come back and operate in Singapore. We risk losing such companies forever if we are not careful with our current policies.

Cost Competitiveness

The reality is that cost and cash flow are bigger problems in our business landscape than some of us may imagine them to be. We saw a few weeks ago in the media how a sub-contractor working for Keppel Shipyard could not afford to pay wages to its workers. There are others out there who also face similar problems and we should see how we can help them improve their cash-flow so that they can survive. We have already given them, on one hand, the opportunities and on the other, the deterrents to ensure that they stay on the path of restructuring and productivity. But they can only do that if they even survive in the first place. We need to help them do that. We need to just look closer at the immediate needs of the SMEs and help them overcome their survival issues.

Two weeks ago, a middle-aged SME owner came to the Prime Minister’s Meet-the-People session. In addition to six Singaporeans, he has hired one foreign worker as a machinist for seven years, while two other foreign workers’ work permits were not renewed last year. He begged that the renewal of his specialist machinist’s work permit be approved, since he has no one else to operate the machine. Otherwise his six Singaporeans workers and his three children and wife will have no means to support themselves. What do you tell this SME owner about rapid restructuring?

Cost has been a perpetual issue in the last five to six years and every Budget has allocated billions of dollars to help Singaporeans. In some cases companies have offset the high cost of living and doing business in Singapore. I think this is not an efficient way to manage things and the right thing to do is to go and tackle the root cause of the problem and in this case address the cost issues. The government has neglected this for too long and we are now facing big problems, therefore costing the government more by having to do special transfers for things like the GST package, Medisave top-ups, utility top-ups, etc. While I welcome all of these measures because the government had failed to address the cost issues in the past, I would like to see future Budgets focus on more permanent solutions for cost reduction that will not cost the government as much as it is costing us today with all the various government transfers.

The high cost of business is also now affecting our ability to attract foreign multinationals to locate operations here. I recently had lunch with a senior banker of a foreign bank, which has large operations in Singapore and he expressed his worry about Singapore losing its competitiveness and the bank having to relook at their future growth strategy in Singapore.

Government Land Divestment Policy – JTC and Rental Costs

Part of this loss of competitiveness is due to high rental costs for businesses and that can be boiled down to one to two key reasons and that is, government land divestment policy. JTC was a landlord for 18% of industrial property some 10 years ago but today manages only 3% of the market. This is a huge shift and the government lost the ability to influence rental prices resulting in developers and investors making the money – this is passive income and not productive income benefiting the investors, including foreigners, who can afford to invest in industrial and commercial properties as an investment tool and not as a productive activity. In return, the smaller companies find that they cannot manage the high rental costs and look for other means to cut cost, which inevitability leads to the squeezing of salaries of workers. This has led to the problem of Singaporeans unable to afford the high cost of living and therefore having to have the government step in year after year with transfers to help them cope. Let me quote one employer who made this comment: “I would be much happier being generous in salaries to Singaporean staff than supporting the high rentals.”

It was a mistaken policy some 10 years ago for JTC to divest its properties that benefited just a few companies, especially the large developers and investors, including the REITs, and we have to reverse this policy even if it means the government having to buy back some of the REITs. In any case the biggest REIT players are government-linked entities like Mapletree and CapitaLand.  I would rather have a situation with many more productive companies benefiting from our land policies of the government than a few non-productive large investors benefiting. In the long run, if we don’t do anything to reverse the situation, we will be in deep trouble as we lose companies to other locations in Asia.

In fact, the cost issue is so chronic that it is timely we place great emphasis and focus on this and that the government set up a cost competiveness committee like what we did 30 years ago to address the same type of problems in 1985. It is useful that we take stock of our problems and causes, and try to find solutions that will help our people in the future.

Minimum Wage

I am glad that the government has finally realised the need for some form of a legislated minimum wage scheme, something I have been asking for the last few years. Failing to convince employers to pay higher wages by persuasion through the progressive wage, we now have a plan which legislates the need for a minimum $1,000 wage for cleaners and, subsequently, security guards and this is greatly welcomed. The current approach will however add to cost pressures for companies and therefore I feel the government could have adopted my suggestion of a government-assisted minimum wage scheme which I suggested during last year’s  Budget debate. Done in such a way, the progressive wage for cleaners could have kicked in without even hurting the SMEs through higher costs to them.

I feel we are neglecting the fact that there are similar low-earning workers in many other sectors of the economy and a limited progressive wage approach will not achieve the objective of helping low-income Singaporeans manage the high cost of living. We may only be helping just a fraction of Singaporeans. Furthermore, implementation of what the government has announced is going to be difficult as we already saw with the caveats announced recently even before the progressive wage system could be implemented for the cleaning industry. As reported in the Straits Times on 24 January 2014, certain categories of cleaners will not benefit from the so- called progressive wage system, as swimming pool and home cleaners, those remove construction debris from work sites, clean building facades on gondolas and animal pens in the zoo are all exempted from this progressive wage system.

Unless we have a universal minimum wage scheme, we will not be able to fully address all the issues related to the cost of living and the exceptionally low salaries Singaporeans are getting for a decent job that they do.

As for productivity, while we have to focus on it as a growth strategy for the future, I have issues with the rate of change we desire. Similarly, while we are focused on reducing dependency on foreign workers, the rate of reduction is too steep and is causing companies huge problems. The ambitious change the government desires is resulting in a confluence of too many factors at one time – high business cost, especially rentals, increasing labour cost as a result of policy changes like the progressive wage system, CPF increases and a tightening labour market, and also a steep reduction of foreign workers quotas. All these are happening together and too fast – a result of us having an “Instant Tree” mentality of sorts.

We must rethink and recalibrate the rate of change if we don’t want to create serious fractures in our future economy. We must focus on two things – the right cost structure, and the right wage levels which can support our cost of living. Done successfully, it would mean the government has done an excellent job in managing the economy and the country.

Inderjit Singh is a Member of Parliament for Ang Mo Kio GRC. This essay is an excerpt of a speech he delivered in Parliament on March 4, 2014, during the Budget debate.

Photo credit: Flickr
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