The long road to achieving Singapore's productivity goal

Singapore's labour productivity fell by 0.8 percent 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 a 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. Its 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. The government's New Year message this year described the country's productivity performance as disappointing – productivity had shrunk by 0.5 percent in the first three quarters of 2014.

When the PIC scheme was first launched, it was estimated to 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 not achieve goals?

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; issues are always resolved in an efficient manner.

Post-startup you enjoy initial tax exemptions and will likely qualify for some if not most of government support schemes that help you make the most out of your dollar. 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 percent annually from 2009 to 2013. Data from the Inland Revenue Authority of Singapore (IRAS) suggests only about 3 percent 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 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 6 percent annually. It is a cause for concern that we have only averaged about 3 percent 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 percent 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 percent 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.

It was previously reported that only 7% of the PIC money actually went to SMEs. This despite SMEs making up 90% of the workforce in Singapore. How can this be? Do MNCs just have whole departments who apply and receive grants while SMEs are too busy actually running and doing business? Surely it should be the other way around?

Just turning 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.