Download Complete Speech in Acrobat Format (356 kb)
Table of Contents
SUPPORTING SME TRANSFORMATION OVER THE NEXT DECADE
4. Let me start with the challenge of transforming our SMEs. Many members such as Ms Jessica Tan, Mr Teo Siong Seng, Mr Inderjit Singh and others, have spoken with great concern about this topic.
5. We have to be concerned about our SMEs. Do they have a future? What role will they play in our economy? Will they be a vibrant part of it or will they suffer and find it difficult to survive, year after year?
6. The SME sector is a critical concern for our economic policies. They are also important from the social point of view because they are mainly owned by Singaporeans, and hire a majority of Singaporean workers. Therefore, keeping that part of our economy alive and thriving is also a way in which we preserve an inclusive society.
7. The operating environment for SMEs, as Mr Lim Swee Say said yesterday, is tough. We must never neglect our SMEs as we go forward.
8. The principal reason why the operating environment is tough is that costs are going up. The reasons are as Mr R. Dhinakaran mentioned a short while ago.
- First, labour is more expensive, because wages have gone up significantly for Singaporeans. Basically, the labour market is tight and will remain that way. This is however a good thing for Singaporean workers, and we do not want this to change.
- Second, rentals are increasing. This is principally because of our natural constraints as a city state, and the fact our business community is on the whole doing well. Demand for office, industrial and commercial space has gone up faster than supply because we have many more businesses being formed, and growing.
9. These are the two major cost drivers – a tight labour market with rising wages, and a strong demand for space (industrial, commercial, office) which is driving up rentals - which reflect our inherent structural constraints as a city-state. Rentals also follow a cycle, and hopefully this year rental growth will level off. We are already seeing signs of moderation in average rentals. MTI will be addressing the issue of rental costs more fully in its Committee of Supply.
10. But the fundamental constraints will remain. We are not a low-cost business location, and will not be in future. So we have to help our companies, and especially our smaller companies adapt to the reality of Singapore being a relatively high cost business location.
11. Where we can, we will try to mitigate or slow down the pace of cost increases. The Government has and will continue to make more land available under the Government Land Sales Programmes. We will ensure that there is sufficient commercial and industrial space to meet demand in the medium-term. If you look at the potential supply of new shop space, there are 90,000 sqm of new shop space coming on stream each year over the next five years. For industrial land too – extra land is coming on stream. In fact, 24ha of industrial land is being made available in the first half of this year.
12. These are the things we will do over the course of the property rental cycle, but the fundamental constraints remain unchanged. This is not a low-cost business location; it is a relatively high-cost business location and therefore needs relatively high productivity, relatively high skills, and the entrepreneurial abilities to put it together and not just survive, but thrive.
13. So this is what the government is focused on – helping our SMEs raise productivity and invest in better jobs, and that way also enable our people to have higher wages. It means training in skills, it means better use of technology, developing new products and better branding, and it means finding new markets abroad, including niche markets for specialised products or services. In each of these areas, the government pledges its support for our SMEs.
Moderating Foreign Worker Growth
Pace of Tightening Measures
14. Let me now address, more specifically, the concerns over foreign worker policy measures – how fast we should tighten, and if we should tighten at all. This occupied a good part of the debate on the challenges that SMEs are facing.
15. We just had another interesting term to describe our reliance on foreign workers - from Dr Lim Wee Kiak - ‘addictive narcotic drugs’. Earlier on we had ‘performance enhancement drugs’ from Mrs Lina Chiam, ‘crutches and braces’ by Dr Chia Shi-Lu, ‘intoxicants’ by Dr Amy Khor, and ‘two rear wheels of a bicycle’, Mr Patrick Tay.
16. Many descriptions, but let me first make clear that foreign workers are and will remain integral to our economy and to our competitiveness. They are a valuable complement to the Singaporean core that we must keep building up in every segment of our workforce. They are arms and legs, and part of the brain, of a competitive global city. Foreign employees are a valuable complement to our Singaporean core.
17. Our strategy of allowing foreign workers at all levels of our workforce - those with low skills and in areas where you do not normally find Singaporeans; those with technical skills; and those with the higher skills, the talented or entrepreneurial individuals who bring specialised skills, networks and opportunities for Singapore - this strategy has by and large worked. It has gone hand in hand with the rise in incomes of Singaporeans, both lower income Singaporeans as well as our middle income Singaporeans. You have seen the data.
18. As Dr Lim Wee Kiak just pointed out, and Mr Lim Swee Say emphasised yesterday, we are not “turning off the tap for foreign manpower”. There is no “cold-turkey treatment” for our companies. This is not a sudden change in policy. It is a graduated and calibrated strategy. We made our intentions very clear two years ago, after the Economic Strategies Committees report, when we started tightening. We introduced a 3 year programme of increasing foreign worker levies.
19. Last year we accentuated the increases, because foreign worker growth had been rapid in an unusually strong economic recovery. This year, we are taking a further step, with a calibrated reduction in dependency ratio ceilings, again because the growth of foreign workers continues to be rapid - and much more rapid than the growth of local workforce.
20. It will not be our last move. We have to watch how rapidly the foreign workforce grows this year. And if need be, we will have to make further moves particularly in the FW levies in the years to come. We will watch this carefully over this next year, and calibrate our moves so that businesses can adjust. We will also accompany any further levy increases with support for businesses to help them upgrade.
21. Members had differing views on the pace of FW tightening. Some members such as Mr Zainal Sapari, Mr Yeo Guat Kwang, Dr Chia Shi Lu, and a few others, were squarely in favour of the pace we have adopted in tightening policies. Some others were concerned and understandably, such as Mr Teo Siong Seng, Mr Inderjit Singh, Ms Lee Bee Wah. They were concerned about whether SMEs would be able to cope and whether we are moving a bit too fast.
22. Mr Low Thia Khiang and Mr Chen Show Mao, I think now recognise that we have to maintain a very careful balance in how we go about our foreign worker policy. I think you have shifted your position because I have checked what was said previously during the 2010 and 2011 Budget and COS debates and also your Workers’ Party Manifesto in last year’s General Election when you criticised the Government for allowing in too many foreign workers. I think your position now accords with ours, and recognises that this is a very careful balance. First, because we have to ensure that our companies can stay competitive, and that Singaporeans thereby keep their jobs and their incomes continue to grow.
23. Second, we have to be extremely concerned about the SMEs, which you have all rightly emphasised. If we withdraw the foreign workers too quickly, this will curb our SMEs and they will not be able to cope with the pace of change. But if we are too slow in tightening on foreign worker policies, the incentive to upgrade will also lessen. And we will face, as Mr Lim Swee Say said, even bigger and longer term problems further down the road. So it is a very careful balance we have to maintain.
24. The Government does not think we can slow the pace that we have adopted in our foreign worker policies - the pace of adjustment of the foreign worker levies, and the moderate reduction in dependency ratio ceilings. As I mentioned earlier, we may have to go further in future years on the levies. For the latest DRC measures, we are giving companies a 2-year transition period for them to adjust to the new DRC for existing workers, as we recognise that businesses have already invested and trained these workers.
25. For the larger companies, this is a challenge most can respond to. Investing in creating better jobs, equipment, looking for new markets, improving their branding. Many smaller companies will be affected, but in fact the number of workers involved in most of these cases is small. For most small companies affected by the new DRCs, they will only need to find a substitute for one or two foreign workers - either finding a Singaporean to take the job, or raising productivity.
Flexibilities in Use of Foreign Workers
26. There are some useful suggestions on some of the flexibilities we should consider in the use of foreign workers, so that businesses can optimise the use of their foreign workers within the dependency ratio ceiling limits.
27. Mr Ang Wei Neng and Ms Tin Pei Ling suggested allowing companies to keep experienced foreign workers who have been trained for longer periods, as long as the company is still within its DRC. There is merit to this proposal. Retaining well-trained and experienced foreign workers is a plus for productivity, and it spares the company from having to re-hire and re-train another foreign worker. MOM is reviewing its policy to see how we can achieve this objective for Work Permit Holders (WPH), particularly for workers who are unable to pass the stringent skills tests but have gained experience on the job and are useful people in the firm.
28. A second area of flexibility that has been raised is in the deployment of foreign workers across job duties within the same firm. We have been very strict about the occupational roles. In our dialogues with industry, business chambers and associations, there have been requests to allow more flexibility for this. For example, in hotels, housekeeping staff may be needed to help out in F&B when there is a slack period in housekeeping. And in small restaurants, they sometimes want kitchen staff who are not being used to be re-deployed as waiters, or vice-versa. In small restaurants, this can be a meaningful boost to efficiency.
29. MOM will look into allowing this. We will start with relaxing the occupational restrictions in the hotel sector. We will be working closely with our tripartite partners to set the criteria and conditions to make sure the productivity improvements also flow through into benefits for our local workers.
30. These are two useful suggestions we have received and we will look into them.
Why Industry-Specific Foreign Worker Allocation will not Work
31. Next, the broader issue of how our foreign worker policy is implemented. In particular, we have had some suggestions from Members as to whether we can give more flexibility to specific industries that seem to have greater need for foreign workers.
32. In reality, we already have different levies and DRCs for the broad five sectors of manufacturing, services, constructions, marine and the process industry.
33. Mr Low Thia Khiang and Mr Chen Show Mao have suggested that this framework is too blunt, and that we should instead work out foreign worker allocations at a greater level of disaggregation, to meet the industry-specific needs, and based on consultations with the industries. Mr Chen Show Mao specifically suggested that high-end industries like Aerospace should be given more stringent limits and industries like construction can be given more liberal limits. Some other MPs had suggestions for the cleaning industry, F&B, retail, healthcare and social services - all of which it was felt had special cases for why they should be treated differently and given more foreign workers.
34. Let me say that this approach has some appeal when you first look at it, and especially if you talk to the businesses, it is a very persuasive case because they are indeed short of workers.
35. But it will not in fact work.
- First, it will not achieve our objective of preventing excessive growth in the overall number of foreign workers.
- Second, it will not achieve our objective of boosting productivity and incomes.
- Third, it is not only impractical in practice, but it can be inequitable - it gives unfair advantage to some firms over others.
36. Let me explain this in some detail, as this is an important issue on how we implement our foreign worker strategy. The reality of the matter is that the most rapid growth of foreign workers has been in the same sectors that we are now asked to make exceptions for.
- These are the Construction industry and services industries like F&B and retail. Services and Construction account for 90% of the total increase in foreign workers that we have seen in the last five years. Within Services, it is basically the industries that the MPs have identified, that are the ones that have seen the most rapid growth.
37. So if we want to be more liberal on them, whether it is in DRCs or levies, either we have to be extraordinarily stringent on the other sectors where foreign worker demand has not been going up, or we accept more rapid foreign worker growth overall. And the likely and realistic outcome is we will have more rapid foreign worker growth overall. That is the upshot.
38. Second if we are going to do something along the lines of what Mr Chen Show Mao suggested, where the more productive and higher skill industries are given more stringent limits, while the less productive ones like construction are given more liberal limits, over time, what that amounts to is that we provide more help to the low-productivity sectors relative to the high-productivity sectors. And that is the opposite of the restructuring we want to encourage in our economy, because that will hamper overall productivity growth. Overall, the economy weakens and slows down. What we instead want to do in every sector - whether it is construction or F&B - is to help every player to raise productivity. For companies that start off from a low base, never mind, raise productivity. For those that are already high in productivity, raise it even further. That is our approach.
39. The levy system is the basic approach we have in place to ration foreign labour. We don’t control the actual numbers that come in but we control the price. It is a level playing field, every firm in every industry knows what the levy is. Within the same industry, if I am competing with another firm and if I am less efficient, I will have to pay more, because I need more foreign workers. If I had to pay more, there is an incentive for me to upgrade. And for an industry is inefficient as a whole, the same incentives apply. So there are incentives for everyone to upgrade.
40. It would not be a sensible strategy to discourage upgrading, weaken productivity growth and seed further growth of our foreign workforce.
41. The same sectors that are in greatest need of foreign workers are also the sectors where our productivity lag furthest behind international leaders, such as Construction, F&B, Retail.
- In F&B, we are three-quarters the level of productivity of Hong Kong and 40% the level of New York. In retail, we are two-thirds the level of Hong Kong and 45% the level of New York in terms of productivity. In Construction, we are one-third the level of Japan, and half the level of the US.
- So, these very same industries which understandably cry out for more foreign workers are in fact those with the greatest scope to upgrade productivity, and to attract Singaporeans into better quality jobs.
42. The third reason why it will not be the right approach to go ‘industry by industry’, or ‘firm by firm’, is because of its complexity, and because it would therefore also not make for an equitable system. There is a great overlap between industries. Even in the current system with broad sectoral distinctions between manufacturing and services, we already face issues of an unlevel playing field.
- If I am a large F&B operator with a central kitchen, my central kitchen is classified as Manufacturing and have an advantage over a smaller company that is not able to have a central kitchen and is hence classified as Services, which is subject to a more stringent Dependency Ratio Ceiling.
- Likewise, in a manufacturing company, in-house logistics is part of Manufacturing, whereas an independent logistics provider is treated as Services, with more stringent foreign worker limits.
43. So, even with the broad classifications that we are making in our current framework, we already have problems at each of the boundaries, and consequently the lack of a level playing field. These inequities will be greatly accentuated if we get down to ‘industry-by-industry’ distinctions.
44. Take the aerospace industry, which Mr Chen Show Mao raised, as an example of an industry which should be given more stringent quotas. What is aerospace?
- In reality, the aerospace industry comprises many different types of companies operating in a broad cluster. It may sound high-end and high-skill, but actually a significant part of aerospace is airframe maintenance and overhaul, which is highly labour-intensive. At the other end of the spectrum are skill-intensive areas like the repair of components.
- Within the aerospace industry, there are some large firms that perform both high-skill and low-skill, labour-intensive businesses, and others that specialise in one particular segment.
45. It will be quite inequitable if a large firm that undertakes both the high end and low end segments is entitled to a higher foreign worker quota on grounds that it is doing low-end work, while a small firm that is competing with it at the high-end is forced to operate within the more stringent foreign worker quota.
46. These are the impracticalities and inequities that arise when we try to choose how many foreign workers each specific industry or firm should obtain based on merit or consultations. Who is more deserving than the other?
47. In fact, Mr Low Thia Khiang made a good point. We should avoid the situation where small firms are disadvantaged compared to large firms, or where a firm that is able to get foreign labour has an advantage and can succeed, while those that cannot are disadvantaged. That is precisely why we should not go about choosing and deciding that you should get more foreign labour and you should get less. It would be highly inequitable and will disadvantage our small firms in practice.
48. It is an interesting suggestion, but you may not have realised fully what its consequences will be. The consequences are quite predictable. It would mean more growth of our foreign workforce, lower productivity growth and a lot of inequity on the ground as well as scope for abuse.
Calibrated Approach towards Employment Pass Holders
49. We have to maintain a careful balance, and this applies also to the issue of Employment Pass holders. Mr Patrick Tay and Mr Low Thia Khiang raised concerns about Employment Pass holders. This is an issue we are concerned about as well.
- First, let me say that Employment Pass holders are an important part of our economy. The growth in Employment Pass holders in our workforce has gone hand-in-hand with the growth of local PME employment, as well as local PME wages. The fact that both wages and employment went up for local PMEs indicate that there has been an increase in demand for local PMEs.
- Likewise, at the lower-end of skills - Singaporeans who perform ordinary jobs in our firms have also benefited from the presence of Employment Pass holders. If you go down and look at any individual company, you will see the complementarities. Without that team of people comprising both Singaporeans and foreigners working in the technical and professional jobs, it would be hard for the company to stay competitive and to generate the jobs lower down in the skills ladder.
50. So, we have to be careful about how we tilt this balance as we go forward. We are tightening on Employment Pass eligibility rules, because we want to build up our Singaporean core in each sector. But we are tightening in a graduated fashion.
51. Maintaining the right balance is crucial for our SMEs in particular, who are an important source of demand for Employment Pass holders and S Pass holders. Mr Low Thia Khiang spoke about the growth trends in both groups of pass holders in the previous two years. In fact, in the last two years, one-third of the increase in Employment Pass and S Pass holders were hired by small firms - those with less than 50 workers. If we tighten too quickly, these small firms will be the most hurt. So let us be careful about how we go about this.
52. I’m glad Mr Low now shares the same objective. We now have the same sense of needing to maintain a careful balance between lowering our dependency on foreign workers and helping our SMEs adapt.
Our Basic Strategy for SMEs
53. We will go about achieving this in a graduated fashion, and will not spare any efforts in helping our SMEs upgrade and improve productivity. I do not need to go through the schemes that have been announced in the Budget, but I do want to address Ms Jessica Tan’s point that some of our brochures about PIC are excessively long. I would like to assure her that no one will need to read 66 pages, which includes all the annexes. We will make it as simple as possible for SMEs. We will go out of our way to reach out to them, hold their hands, work with the business associations, enterprise development centres, and CDCs. We will proactively look for SMEs and help them to take advantage of our schemes, instead of waiting for them to come forward. We will talk more about this during the MOF’s Committee of Supply.
54. Mr Inderjit Singh asked if we will are overtaxing our SMEs, if we add up all the taxes that they pay. Now, our tax rates in Singapore are extremely low. Our tax rates for SMEs are lower than most jurisdictions. A small enterprise with a turnover of less than $10m pays on average corporate income tax of 8%. In Hong Kong, the same size company would pay about 16.5%, and in Taiwan about 17%. The other developed countries typically have higher tax rates.
55. There is then the foreign worker levy, which is a form of tax. But as I emphasised in the Budget, we are giving back much more to companies through our tax deduction and grant schemes, much more than the increase in foreign worker levies. And this applies especially to SMEs.
56. Not everyone will get the same support. We have adopted a strategy that that deliberately favours those that are doing something to train their workers, invest in equipment, and make better use of technology - anything to raise productivity. The gains are substantial, even for companies that do not have taxable profits - they can get a very generous cash co-payment. For every $100,000 of expenditure on productivity, the Government will pay $60,000.
57. But the company must do something, the company must invest in something, and then it gets aggressive support. That is our basic approach, and I think we have at least a fair chance of success. As Mr Lim Swee Say had emphasised yesterday, we cannot say for sure that we are going to succeed. But I think we have at least a fair chance of success, of ensuring that amongst our SMEs today and the new SMEs to come, that we will have a vibrant pool of Singapore firms 10 years from now, and with a significant international reach.