Tag Archives: Economics

What will the average local eat tomorrow?

Closing DownAnother massive rent-hike and another cheap local eatery out of business. The government has made a point of telling us that while cost of living may be expensive for expatriates, things are still very affordable for the so-called “average local” – but this logic is problematic. Firstly because it is the cheap local eateries that cannot afford to carry on in high-cost Singapore, but also because the distinction between expat and local cost of living depends on a very narrow world view. With an eye on income inequality more generally, it seems clear that businesses catering to the lower cost “average local” market are the ones being squeezed out, and the less well off are the ones suffering.

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Answered: Are foreign workers exploited in Singapore?

Passport to exploitation?The question of whether or not foreign workers in Singapore suffer systemic abuses continues to attract government denials and rebuttals, but to many observers the answer has long been settled with an obvious and resounding yes. In recent years Singapore has twice been rocked by apparently disgruntled workers, firstly with the SMRT bus drivers strike, and secondly the Little India riots. The plight of SMRT’s Chinese drivers was well documented in the months after they refused to work, but as the government continues to deny such realities in the wake of last year’s riots, it seems clear that crucial lessons have not been learned. As long as such problems go ignored, denied and unresolved, relations between foreign workers and locals are likely to be volatile.

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Do Singaporeans eat tomatoes? Let’s understand cost of living

Eggs and tomato.  Expat favourite

Eggs and tomato soup. Expat favourite

Take a few eggs with peanut oil to fry them, add some chopped fresh tomatoes and mix it all up. Serve alongside a bowl of white rice and wash it down with orange juice. Is this the expatriate lifestyle Finance Minister Tharman had in mind when rebutting the Economist Intelligence Unit’s finding that Singapore is now the most expensive city in the world? Because all those items are included in the shopping basket used by the EIU to assess cost of living globally – including the frying pan you cook it in and the dishwashing liquid you use to clean up afterwards. So it seems unlikely that Tharman was correct when he said the survey does not accurately reflect the cost of living for locals.

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Structural problems doom Progressive Wage Model to failure

I originally wrote the below article as an exclusive for The Online Citizen. I am reproducing it here with their permission.

Zoom2Launched and promoted to great fanfare by the ruling party, the progressive wage model looks good as a press release, but is hamstrung by the twin flaws of obviousness and impossibility. Obviousness, in the sense that it describes a relatively straightforward career progression ladder that employees should be encouraged to climb toward greater salaries – an idea that many would suggest does not require a million dollar minister to think up. But also the impossibility of the system is glaring, because there appears to be no way to actually require employers to give their staff the chance to climb this skills ladder. In fact, one look at an example “wage ladder” reveals another truth which should have been obvious – a company staffed with employees who have all reached the highest rung would be very “top-heavy” and probably unsustainable as a business.

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[Updated 1] Triple confirm. “Tightening on foreign labour” was a lie.

Updated: The editors at TRE pointed out quite rightly that the increase in the number of foreign workers coming to Singapore is on target this year to be less than in previous years. Whether this “reduction in the increase” represents a tightening rather than a “slower loosening” is debatable. The chart below appears to show that the overall trend is mostly unchanged. However, the most important questions still remain. In light of increasing unemployment and decreasing wages, can the government be said to have delivered policy results that benefit Singaporeans? Despite lots of noise around a “tight labour market”, it would appear not.

Government claims to have been tightening on foreign labour could never be reconciled with a population white paper that laid out a path to GDP growth through massive immigration. As I wrote at that time, propaganda rather than policy changes appeared to be driving the debate. The truth – that the government is not tightening the inflow of foreign workers – has recently been revealed by three pieces of information released by the government itself. These revelations leave many in government with some explaining to do – why so much focus on the problems associated with a labour shortage when one does not appear to exist. On the contrary, the problems caused by an over abundance of cheap foreign labour – stagnant wages and increasing unemployment – are very much still present and, if anything, worsening.

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Botched Tender? LTA performs u-turn on private bus operators

The decision to award the first City Direct private bus tender to ComfortDelGro – the parent company of existing public operator SBS transit is baffling. The original intention to use private operator capacity to augment existing public operators appears to have gone up in smoke. Was the introduction of competition to the existing government controlled duopoly operators too dangerous? Or was the tender itself simply botched up?

Original Intention

Lui Tuck Yew, then Minister for Transport, describe the tendering process thus –

“I have also asked LTA to see how we can tap on the resources of private bus operators, given that the two [Public Transport Operator]s’ resources are already very stretched”
Speech by Lui Tuck Yew, Minister for Transport, at the parliamentary debate on the population white paper. 5 Feb 2013

Josephine Teo later re-iterated this point in an oral reply in parliament –

“the move to invite private bus operators to run City Direct bus services is to tap on their existing resources to improve bus service levels. These operators may have existing buses and drivers available in between their other assignments, such as ferrying school children or workers, and it is our aim to contract them for the required bus services.”

Josephine Teo. Oral Answers to Questions. Parliament Reports. 9 July 2013.

On the face of it, this plan seems perfectly reasonable. Private bus operators with spare capacity and an interest in growing their business can be brought into the industry to address an apparent shortage of resources amongst public operators. Another obvious but unspoken change that such a move would bring is increased competition in the transport segment. The current model, where two operators – both of whom have the state as their largest shareholder – enjoy a duopoly is arguably less good at delivering value to customers than it is at delivering guaranteed profits to shareholders.

Private, Public or Parent?

In awarding the tender to ComfortDelGro, the parent company owning 75% of existing operator SBS Transit, LTA appear to have performed an abrupt u-turn. Ms Teo and Mr Lui’s stated goal of using private capacity to supplement public shortages does not appear to have been realised. While CDG does own a bus operator separate from SBS Transit, there is no meaningful independence between the two companies. With such a large shareholding, CDG enjoys almost complete control over SBS Transit – CDG’s owners control a large enough share of SBS Transit to dictate the running of the company. This is underscored by the management structure. The Chairman of SBS Transit, Lim Jit Poh, is also Chairman of CDG. SBS Transit’s deputy chairman, Kua Hong Pak, is listed as “Managing Director/Group Chief Executive Officer” in CDG’s annual report.

Rather than bringing private operators into the industry to bolster capacity, LTA appear to have achieved nothing more significant than enabling the management of CDG to work with the management of SBS Transit (who are in fact the same people) to use the resources of the former to alleviate the constraints of the latter. While the substantive difference Ms Teo and Mr Liu originally sought to draw between public and private operators is not obvious in hindsight – a bus is a bus after all – getting a parent company to assist a child company is not a game-changing achievement. One is left wondering, if the solution were this simple, why did SBS Transit and CDG not find a way to work together sooner to solve the ongoing transport crunch? Were they suitably incentivised to innovate and problem solve?

Whither Competition?

Competition is the greatest spur to innovation, and it is something that has clearly been lacking in many sectors of Singapore’s economy. Enjoying a comfortable duopoly with 54% Temasek owned SMRT in the transport segment, SBS has earned significant profits – achieving a return on equity over 10% from 2008 to 2011 – before falling to 5.5% in 2012. Were SBS complacent in the knowledge that there were no competitors existing or likely to emerge to their bus operations? Probably. Could SBS really not have found a way to increase their “stretched” capacity without waiting for LTA to award a tender to their own parent company? A parent company with the same senior managers? It seems unlikely. The suggestion that management were complacent due to a lack of competitive pressures is hard to avoid.

As it stands, the move does nothing to increase competition in the sector. The current duopoly is not threatened by a “new entrant” which is in fact closely related to an existing player. Will the man who is Chairman of both SBS and CDG allow his new operator to aggressively challenge the position of his existing player? Again, it seems unlikely – and this represents a missed opportunity. While increased competition was never explicitly mentioned as a reason for the tender to private operators, the language used caused many – not unreasonably – to assume this was an expected outcome. The government controlled Straits Times reported on expected bids from both Woodlands Transport and The Singapore School Transport Association – but made no mention that CDG might bid.

The opportunity to bring new blood into the industry, not just in terms of capacity, but new management and new ideas as well, should not have been missed. Faced with a threat to their duopoly, SBS and SMRT would have been forced to re-asses and improve their operations. Conversely, awarding the tender to a government-owned company linked to an existing PTO further entrenches the existing state-duopoly and reduces opportunities for new entrants to break into the industry. It could be that the government feared the effect of competition on the existing players – both of whom have the state as their largest shareholder – and decided to favour a bid from a related party. It is hard to know. It could also be that the government intended to bring in new players from the private market, but botched the tender by not realising that SBS’ parent company would be eligible to bid. If financial parameters were part of the selection criteria, then it is likely that CDG would have an advantage over smaller private operators – and while it could be that this is what happened, it is impossible to say for sure.

As a believer in the driving force of competition, one can only hope for a better outcome in subsequent City Direct tenders. However, only ten routes will be tendered in total and all are likely to be valuable to a new player seeking to establish themselves. For this reason, the decision to award the current tender to CDG is particularly disappointing – with any luck, subsequent routes will go to a new player with real independence from the existing government linked players.

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PM tweaks troublesome policies, underlying problems remain

“Major turning point”, “strategic shift” and “an epochal speech”. These are some of the terms used by the PAP and their supporters in an attempt to make out that after a year of “National Conversation”, the government had listened and was willing to make drastic changes to improve the lives of Singaporeans. Others however were less impressed – myself included – not least because the policy announcements clearly did not live up to the hype, but most importantly because the superficial changes announced did nothing to address the root causes of the problems facing ordinary Singaporeans.

The policy changes announced came under three predictable headings – housing, healthcare and education. The changes to education policy – forty places at every primary school reserved for P1 students with no ties to the school, and quoting PSLE results as grades rather than raw scores – seem particularly inconsequential. To housing and healthcare however PM Lee dedicated the majority of his speech and it was in these areas that the government’s inability to identify or address the real problems facing Singaporeans was most obvious. Two phrases used by the PM in particular caught my attention – to help people “level up” and to “share the risks”. But in neither housing nor healthcare policy do these phrases rings true, in fact the opposite is closer to reality in Singapore, and therein the supposedly “game-changing” qualities of PM Lee’s National Day Rally speech are quite underwhelming.

Housing – Leveling Up?

PM Lee dedicated a large portion of his speech to playing the role of a HDB housing agent, trying to convince listeners that flats are affordable. Being the good salesman that he is, he repeated the phrase that housing is “affordable” or that we can “afford” it no less than nineteen times. Is the provision of affordable housing suddenly a “major turning point” for the PAP? It seems unlikely, since the government has ostensibly been providing such a service for decades. In his role as HDB housing agent, PM Lee dutifully reeled off a list of grants and benefits available to purchasers, but one would have to try hard to distill a “strategic shift” out of what was mostly a PR exercise in reminding Singaporeans of the numerous schemes already in existence. Only after re-reading the transcript of Lee’s speech was I was able to detect one new policy announcement – an increase in the Special Housing Grant (SHG) of $10,000.

Existing, just the present arrangements, you will have $45,000 of grants already, various things. But now because we have changed our SHG, you will get an extra $10,000 of grant
PM Lee, National Day Rally Speech, 18 August 2013

This couldn’t possibly be the game changer, could it? Increasing existing grants of $45,000 to $55,000? It sounds exactly like “more of the same” rather than a strategic shift.

Ironically, if one wanted to find a strategic shift in housing policy, one would only have to look at PM Lee’s NDR speech from 2011. It was on that occasion that Lee announced an increase in the HDB income ceiling from $8,000 to $10,000. While that $2,000 increase is not in itself a large amount, this policy change was actually much more drastic than it seems, simply because the ceiling had not been increased for seventeen years previously. Accounting for inflation, that $8,000 income ceiling was worth over $10,000 seventeen years ago, but the question to consider is whether or not someone earning that much in the 1990s needed help from the government to purchase a home. “Condo” used to be one of the “5 Cs of Singapore”, and it was surely the expectation of the government in those days that anyone earning more than the income ceiling would be able to afford private housing in an ostensibly rich country like Singapore. Furthermore, by chosing to keep the income ceiling fixed for almost two decades, there was likely an implicit expectation that more Singaporeans could “level up” as their wages increased over the $8,000 threshold to move into private housing.

In fact however, housing and other cost of living factors have outstripped wage growth in recent years, so more and more Singaporeans who earned over the old income ceiling found themselves stuck – earning too much to buy a HDB but not enough to “level up” and buy a condo. This is the underlying problem that PM Lee ignores in his NDR speech – he has done nothing to address the fact that Singaporeans’ wages lag inflation. By instead chosing to give out more government grants, he merely kicks an increasingly painful can down the road. Without solving the problem of low wage growth, what can PM Lee possibly have in mind for 2015 or 2020? Increase government grants, again and again? Similarly to the short-sighted policies of the population white paper, this is a thoughtless non-solution to one of the biggest challenges facing Singaporeans.

Healthcare – Sharing the Risks?

It’s well documented that healthcare spending in Singapore is funded disproportionately out of the pockets of citizens rather than through general government spending, and this reflects the fact that the risk of falling sick here is borne mostly by citizens as opposed to being shared with the government. According to WHO figures from 2011, the proportion of healthcare spending met by the government was 31% in Singapore compared with an OECD average of 61.4%. Even more shockingly, the Singapore government appears to use this predominantly patient funded healthcare system as a source of revenue. If you only learn one thing this week, let it be this: between 2001 and 2010, MediShield collected over $2 billion in premiums and paid out less than $1.3 billion in claims, for a net revenue gain of $850 million. That in Singapore, a supposedly rich country with vast financial assets and reserves, the government not only forces the burden of healthcare spending onto residents, but then in fact sees significant net revenue generation from the healthcare system is inexplicable.

In light of this, it is obvious that MediShield can take on greater responsibility, but the policy announcements made were again underwhelming and neglected to address the root cause of Singaporean’s concerns. As noted by others, extending MediShield to become MediShield Life is an improvement, but an obvious and long overdue one at that. Further changes to increase the circumstances in which MediSave funds can be used to pay for outpatient treatments are also welcomed, but cannot be seen as an increase in government risk sharing, rather these changes merely allow one to use ones own accumulated funds for healthcare spending rather than paying out-of-pocket.

The most telling change announced to healthcare policy however was a commitment to provide “better protection for very large hospital bills”, although in announcing this, PM Lee went to great lengths in asserting that “very very few” people suffer such large bills under the current scheme. One wonders if he himself didn’t see the irony in launching a scheme while at the same time trying to assert that almost no-one would benefit from it – less than 1 in 140 patients if PM Lee’s own MPS are a statistically valid sample. Of course, the details of how this change will be effected were not spelled out, so it is not clear how much increased risk the government will bear, but it is assumed that this will involve an increase to the “claimable limit”. In fact, the very existence of this claimable limit betrays the fact that the entire risk (although not the entire cost) of healthcare funding in Singapore is borne by patients. Once the cost of treatment exceeds this “claimable limit” threshold, the patient is responsible for 100% of the cost. So while the government may assist up to some pre-calculated point, the unbounded upper limit on expensive treatments is in fact borne completely by the patient.

To be truly game-changing the PM’s speech would have needed to address two areas – the profit element and the risk element. Firstly, MediShield should not be a revenue generating operation – as it has been over previous years – but Lee did not appear to address this point.

But because it does more, because the benefits are better, therefore, the MediShield Life’s premiums will have to be higher. It has to be, because it has to break even and I think for most people that will not be a problem.
PM Lee, National Day Rally Speech, 18 August 2013

Of course, there was the expected rejoinder that MediShield premiums would have to go up to reflect the enhanced coverage offered, and PM Lee did make reference to breaking even, but this does not appear to be a statement of budgetary policy so much as an attempt to manage expectations – don’t think you are getting these MediShield enhancements for free. Certainly, PM Lee made no mention of a move away from net revenue generation and no mention of the hundreds of millions in premiums MediShield has accumulated to date, so it would be presumptuous to assume such a significant shift will occur unannounced.

Secondly, on risk, it is hard to avoid the conclusion that residents shoulder an unreasonable share of the cost and risk of falling ill. A more helpful, more significant change would be a commitment to increase the government’s share of healthcare spending much closer to the rich country average (61.4%) when it current languishes at a level almost exactly half that. For a country as wealthy as Singapore, there is no obvious reason (other than political ideology) for healthcare spending to even be less than the average of other rich countries because Singapore is in fact much better off than those other “rich countries”. But unfortunately there is no commitment to make a long-term change in spending policies, no intention to shift the burden from the individual to the state, no hint that revenue will not continue to be generated by MediShield and no clue as to what will happen to the premiums already collected. And most tellingly, while there may be changes to the claimable limit, it appears that MediShield Life will continue to abandon those patients with the highest bills just when they need their insurance coverage the most, so when it comes to “sharing the risks”, the ruling party in fact continues to shirk their responsibilities.

* * * * *

Despite the great fan-fare of a national conversation, and the extraordinary hype of this speech being both a major turning point and a strategic shift, the truth is that nothing much has changed. The government appears to have no policies in the pipeline to solve the underlying problems of low wage growth and the ever-increasing cost of living. While increased grants are likely to be popular today, failing to solve the root cause means the exact same issues will inevitably recur year after year. The government can’t surely see this as a long-term, sustainable plan, but it appears to be all they have. There was also no real indication that the government intends to make an ideological move away from revenue generation. MediShield has accumulated hundreds of millions over the years, but the announced increases in coverage were tempered with a predictable warning that premiums would have to increase in line. “It has to be” said PM Lee. And still, the majority of the risk and cost of falling sick will fall on residents rather than be covered by government policies. Under the PAP, it has to be.

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