Need to tweak policies on productivity and workforce

This response was first published in the Business Times on 8 February 2013.

This refers to The Business Times editorial of Feb 6 on the White Paper on Population. The editorial focused on the concerns of local businesses about proposals to cap workforce growth to 1-2 per cent a year until 2020 and plans to lower the number further in the long run.

Painting a rather worrying future ahead, BT indicated that companies which cannot quickly implement productivity-raising measures "will sooner close down or relocate than innovate or automate".

While, quite certainly, most firms are finding it tough adjusting to the tighter foreign labour policies, it is too simplistic to tar all businesses with the same brush.

There are different types of businesses and industries in Singapore. Some lend themselves to automation more readily than others. Some are able to cut costs by outsourcing or moving certain operations to cheaper locations. Then there are some - and these are the businesses which are bearing the brunt of the tighter foreign labour policies - which need more time to adjust as increasing productivity in these sectors may not be as straightforward as substituting a pair of hands with equipment. Unfortunately, this last category (typically the retail, food and beverage, hospitality and construction companies) rely heavily on foreign workers.

First of all, if we are to introduce effective measures to help companies in Singapore adjust and adopt the push to reduce their reliance on foreign workers and increase productivity (and they will have to at some point), they will have to be targeted at the needs of the different industries. Representatives from government agencies, unions and the businesses themselves should come together to form work groups and develop productivity strategies uniquely tailored for each sector. Government policies and assistance schemes can then be crafted accordingly.

For example, the Productivity and Innovation Credit (PIC) scheme, which was introduced to help companies to innovate and raise productivity levels, could be tweaked to increase the level of support that companies (particularly SMEs) are able to get. The scheme gives support for six different activities, with a cap on the amount of benefit a company can claim for each activity.

From our experience, the two main activities for which companies are able to access the PIC scheme relate to automation and training. The remaining four activities (acquisition and registration of intellectual property rights, research and development, and approved design projects) are of relevance only to a limited group of companies. So industries that have a heavy reliance on overseas labour and yet are identified as having greater potential to automate, and/or have the ability to reduce their reliance on foreign labour, should be allowed a higher cap for their PIC claims in relation to expenses incurred on automation or training to raise productivity of local employees for each relevant activity.

Incidentally, the government may also want to give some thought to extending the PIC scheme as it is slated to expire in the year of assessment 2015, since it is clear that Singapore's productivity efforts need more time to yield effective results.

BT also quoted statistics from the latest manpower survey by the American Chamber of Commerce, which stated that 5 per cent of respondent companies had already relocated out of Singapore and a further 15 per cent are considering doing so.

These figures may be alarming on the surface, but may also be an arrangement that ultimately allows Singapore businesses to survive. Both international and local firms in certain sectors can easily redistribute some of the more costly aspects of their production activities to countries where labour and land is cheap.

The issue that needs to be addressed for these sectors is how to persuade them to retain that part of their operations at the higher end of the value chain in Singapore. These would possibly include headquarter functions, supply chain control towers, intellectual property ownership and management, treasury functions, etc. This sort of "twinning" arrangement would allow businesses to remain competitive and become more profitable while at the same time tap the skill sets of the relatively large pool of educated Singaporean professionals, managers, executives and technicians (PMETs).

To this end, the government may want to consider giving Singapore companies financial or other assistance to relocate certain parts of their production operations overseas - such as Iskandar Malaysia, the development region across the Causeway - especially if the companies pledge to maintain the other, high-end aspects of their business here.

Finally, we must address the needs of businesses for which there is no substitute for human workers, but which offer jobs that Singaporeans are not keen to take up. In particular, quite a large number of local small and medium-sized enterprises (SMEs) seem to fall in this category, and for them the future might seem bleak as they may not even have the option of relocating elsewhere.

In Professor Tommy Koh's article in The Straits Times ("What Singapore can learn from Europe", published on May 19, 2012), he observed while looking at the Nordic states that the average monthly wage of a cleaner in Denmark is $5,502 while in Sweden it is $3,667. In Singapore, he noted, it was just $800.

He attributed this disparity to Denmark and Sweden having better productivity standards as well as having tighter foreign labour policies. The influx of foreign workers, he argued, can reduce wages.

In other words, Singapore businesses need to improve productivity so that they can make do with fewer workers and yet offer them better wages. Investments in employee training are therefore especially important for this group of businesses and where, again, a targeted PIC enhancement for training activities would come in handy.

In the immediate future, the government could consider whether and how it can relax its stance on tightening the foreign labour supply a little to give these businesses more time to adapt.

It is indeed vital for Singapore to reduce reliance on cheap foreign labour and raise productivity. This mantra needs to be taken more seriously and more effort needs to be put in place, especially if we want to reduce the widening gap between top and low earners here.

However, the government should ideally give another five years before taking heavy measures on workforce growth. In the meantime, some fine tuning of foreign labour policies would allow companies highly reliant on such labour to achieve better productivity measures as well as be better prepared to absorb changes.