How should Singapore increase productivity?

Singapore’s labour productivity fell by 0.8 per cent in 2014, marking the third consecutive year of decline for productivity.

That’s right – a decline for the third consecutive year. Now, let’s take step back: What happened three years before 2014? The Singapore government introduced the Productivity and Innovation (PIC) Scheme in Budget 2010, a scheme which was further enhanced in 2011 and 2012. It’s purpose was to provide tax deduction and allowances for businesses that invest in productivity and innovation.

While PIC-adoption rates have increased in the past years, the scheme’s real impact on productivity still comes into question. Prime Minister Lee Hsien Loong’s New Year message this year described the country’s productivity performance as disappointing – productivity had shrunk by 0.5 per cent in the first three quarters of 2014.

When the PIC scheme was first launched, Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam estimated that it would cost the nation $480 million. Following subsequent enhancements, the annual cost of the PIC has risen to about $1 billion. How did such a hefty investment backfire?

As an entrepreneur in Singapore, I must commend the Singapore government for its commitment towards the supporting and nurturing of young businesses. As a nation, Singapore holds a steady record of championing global Ease of Doing Business rankings. Setting up in Singapore is relatively easy – language is not a barrier, the infrastructure is excellent and not only is support always around when you need it but issues are always resolved in an efficient manner.

Post-startup you enjoy initial tax exemptions, low corporation tax thereafter, tax free dividends and will likely qualify for many government support schemes that help you make the most out of your dollar but usually only if you're an MNC not an SME (see last couple of paragraphs and not all grants if you're a serial entrepreneur like me - see last couple of paragraphs).

In PIC’s case, in the government’s attempt to undertake a broad-based approach in supporting businesses, the term ‘productivity’ was loosely defined – qualifying activities could range anywhere from staff training, information technology, automation equipment to research and development.

Since the introduction of PIC in 2010, the tax authority has probed more than 158 cases; of which more than $3 million worth of payouts were either recovered or blocked. In most cases, conniving ‘businessmen’ were exposed for:

• Using fake documents to claim for non-existent purchases or inflating how much they had spent;
• Creating a shell company to claim for purchases of equipment, when there was no business activity and no such purchase;
• Listing relatives and friends as staff, when they did not work for the company, to meet the minimum number of local staff required to qualify for the scheme.

Such repeated offences have led the government into setting up a nine-member task force in August 2013 to focus on busting PIC fraud.

In 2014 alone, 54,000 companies made PIC claims. Up till then the PIC Scheme was reported to have cost the government up to S$1.8 billion in total. While construction businesses were big claimants, the sector achieved productivity improvements of only 0.8 per cent annually from 2009 to 2013. Data from the Inland Revenue Authority of Singapore (IRAS) suggests only about 3 per cent of PIC claims were related to innovation.

Failing to meet its objectives and in view of such abuse, is there still a role for the PIC to play? Earlier this February, the Singapore government announced in Budget 2015 the non-extension of the PIC Scheme. Additional measures to support innovation and internationalisation were introduced instead, such as the International Growth Scheme (IGS), in effort to encourage more Singapore-based companies to look towards overseas expansion through the provision of tax concessions.

Looking back at Singapore’s performance in the ten years between 2000 and 2010, the economy was growing steadily at an average rate of six per cent annually. It is a cause for concern that we have only averaged about three per cent per year in the last four years. But is productivity rate alone a fully-inclusive measure for growth? The counterfactual, especially, is an unknown.

What if there had been no PIC? Would innovation and productivity have declined to even lower rates? To make a sweeping statement and condemn the PIC as ineffective, we need to look at other underlying factors. The inflow of foreign workers for example had been reduced significantly in the past years, signifying higher quality growth aimed at the development of Singaporeans.

In a recent KPMG survey, it was revealed that 41 per cent of companies attribute their most serious operational issue to be rising costs of rental and labour. Contrary to what current measures seek to mitigate, only 20 per cent reported it to be innovation or raising productivity.

Apparently companies fail to see how the constant push to increase innovation and productivity can help them resolve higher rental and labour costs. To help companies phase into rising costs, it was announced as part of this year’s Budget the extension of the Wage Credit Scheme (WCS), up to 2017.

As I have heard from many Singaporeans, “Government give money, just take la!” – there will always be businesses who take advantage of such schemes to buy their employees a Macbook each. On the other hand, there is also the SME on the road of innovation to take their business to the next level. It is a tough call to balance supporting true productivity initiatives whilst keeping the black sheep at bay.

In an editorial in The Straits Times it was reported that only 7% of the PIC money actually went to SME’s. This despite SME’s making up 90% of the workforce in Singapore. How can this be? Do MNC’s just have whole departments who apply and receive grants while SME’s are too busy actually running and doing business? Surely it should be the other way around?

I have to admit my own experience of starting a business in Singapore was seamless and now I have two such is the ease of doing so here. However I have never received any money from the government in doing so. At the start I was advised to apply for a Spring grant. I did and then I got rejected on the basis that:

1) I had been an entrepreneur before but not in Singapore (I was honest enough to reveal I had been one in the UK) which seems ridiculous as surely you encourage serial entrepreneurs and new ones with some experience of being one elsewhere?

and

2) Spring didn't think that my business had scale - love that one, going to frame that. That was when I was one person in one country. Now we're 20 people in 6 countries and going to double again by year end. Is that scalable enough?

The reason I think was that the case office did not even have a profile on LinkedIn - only facebook. This says everything about many Singaporean's firms, especially government bodies and their view of Linkedin, If they're not on it, as many locals are not, then they think their audience (all B2B) are not too). The fact that this guy was in charge of SME grants, i.e. small business and there are 2million people from Singapore on Linkedin, seem to escape him plus his ability to understand a non-facebook business orientated social media.

Turning just 50 this year, Singapore is only at the beginning of the long road to achieve its productivity goal. As the pieces slowly fall into place, both the government and businesses have a part to play in maintaining an agile and open mindset that is flexible towards changing business needs. This means more than PIC schemes and more open minded views of business social media that can increase productivity as LinkedIn, for example, can.