Budget 2016: Pressing on with Economic Restructuring

Apr 04, 2016 at 11:27 am | Hits: 2085

By Faizal Bin Yahya and Chang Zhi Yang

As noted by Finance Minister Heng Swee Keat in his maiden Budget speech on 24 March, Singapore is expected to face weaker prospects overall in the coming year. Yet, despite the looming cyclical headwinds, it is essential for Singapore’s economy to press on and complete the current economic restructuring initiatives that were started five years ago.

We will highlight two important features of Budget 2016:

1. The clear move away from broad-based support towards more targeted support

The Productivity and Innovation Credit (PIC) Scheme, which was introduced in 2010 to support a broad base of investments in productivity, will lapse in 2018. The amount of money spent on the PIC scheme has been huge; in 2014 and 2015 alone an estimated S$3.2 billion (which includes the PIC bonus) was transferred to companies via the scheme. Admittedly, a scheme as large and generous as the PIC would inevitably be prone to market abuse and fraud. Nonetheless, the PIC scheme also pushed many SMEs to embark on investment activities to improve their productivity, which they would otherwise find too expensive to undertake. The government’s focus now is to get them to further move up the value chain, and be innovative, value creating enterprises.

2. An integrated approach to achieving sustainable, quality growth

The new Industry Transformation Programme, for which the government has set aside S$4.5 billion, aims to help companies achieve sustainable and quality economic growth driven by innovation. There are three pillars in this programme: Transforming enterprises so they can remain nimble and increase the markets they serve; transforming industries to encourage strategic thinking and a growth mindset within the sector so that they can support companies sufficiently; and transformation through innovation, which is a long-term plan to help companies continue to build on strengths and create further value.

A Business Grants Portal will be introduced later this year to help SMEs access available government schemes more efficiently. As Minister Heng accurately pointed out, the current government incentive and scheme landscape is like an “alphabet soup” and can be confusing to many companies. Government support should be “enterprise-centric” and not “scheme-centric”, he said. The Business Grants Portal, by organising government schemes along core business needs of capability building, training and international expansion, will help SMEs better navigate the slew of help schemes.

Yet, we hope that there are other bolder plans in the pipeline for the business portal. In particular, an ambition to make it a truly smart portal — driven by data analytics and computing technology — that offers automated tailored business advice that extends beyond grants to companies according to their specific needs and constraints. This would fit nicely with the government’s vision for Singapore to be a Smart Nation. We are cautiously optimistic about this prospect, viewing how the EnterpriseOne Portal has evolved successfully into a much more user-friendly and helpful SME Portal.

There is also the proposed Automation Support Package, which promises up to 50% funding of qualified automation projects and the possibility of a 100% investment allowance for the purchase of approved automation equipment. The government will also increase risk-sharing with participating financial institutions that provide loans to companies for such equipment, from 50% to 70%. And because such large-scale automation projects often enable companies to scale and internationalise, IE Singapore and SPRING will work together to help them access overseas markets.

This package addresses three important factors that companies have to consider when making business investments. The 50% cost subsidy and 100% investment allowance addresses the investment cost consideration. The enhanced risk-sharing with financial institutions partially tackles the financing consideration. Lastly, the support from IE Singapore and SPRING helps overcome the market demand consideration. This is definitely a breakthrough effort on the government’s part to provide more holistic support to companies, as it recognises the interplay of multiple constraints that could hinder the efforts of companies in restructuring and transforming their businesses.

To help SMEs weather cyclical headwinds and grow, the government has introduced the SME Working Capital Loan, for loans of up to S$300,000 per SME. Under this scheme, the government will co-share 50% of the default risk for related loans with participating SMEs. This measure is important as it will improve access to much needed working capital for SMEs with tight cash flow so that they can make essential investments and benefit more from government grants that are paid out on a reimbursement basis. The scheme is also likely to further catalyse the growth of private sector SME loans as financial institutions recalibrate and refine their credit assessment processes.

Notwithstanding, SMEs can benefit from greater access to other financing sources like the capital markets and crowdfunding. The government should also consider being more directly involved in the financing of SMEs so that it can better tackle the market gaps from a social point of view. It is hard to imagine private financial institutions incorporating into their credit assessment models the externalities arising from SME development, such as better employment and a stronger economy.

To tap the strengths of trade associations and industry chambers (TACs), the government will set aside S$30 million to further develop their capabilities. TACs are natural partners for the government to drive government-industry initiatives, given their intimate knowledge of respective industries, extensive connections with the business sector and support provided to companies. Besides funding, the government will also second up to 20 public officers to interested TACs. This could be a game changer for Singapore’s next phase of economic development. As a natural touchpoint to businesses, TACs provide an ideal environment for seconded public officers to gain a thorough understanding of industries and companies, and build strong lasting relationships with important stakeholders. These qualities are essential to formulating good public policies.

Nonetheless, the impact of this initiative depends on several factors; mainly, the kind of officers seconded to the TACs, the work plan for these seconded officers, as well as how the initiative fits into the overall plan of government-industry collaboration to drive economic development. The potential risks of conflict of interest and regulatory capture must also be addressed.

Despite being the first budget of the current term of government, Budget 2016 has managed to pack in a gamut of substantial measures to support companies and their development. This is important as Singapore has crossed the Rubicon of economic restructuring, and it should resolve to complete the transition to growth driven by innovation.

But perhaps more crucial than the quantum of support is how the programmes will be implemented. Hence, we keenly await the Committee of Supply debate, which begins today, for more information on the budget initiatives.
Dr Faizal Bin Yahya and Chang Zhi Yang are Senior Research Fellow and Research Assistant, respectively, at the Economics and Business research cluster at IPS.

Top photo from Ministry of Finance (Singapore) Facebook Page.

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