Copyright 2009 Singapore Press Holdings Limited. All Rights Reserved

The Business Times

Why SMEs don't bite the productivity carrot

Govt urged to refine schemes which some are finding too 'micro-targeted'

(SINGAPORE) If Budget 2012 is to prioritise Singapore's long-term transformation into a productivity- driven economy, then schemes meant to push companies in that direction need improving, participants at BT's recent pre-Budget roundtable said.

While recognising that such measures take time to bear tangible fruit, the participants stressed that the weak take-up rate of companies is reason enough to question their efficacy now.

Only a fifth of companies have claimed tax relief under the key Productivity and Innovation Credit (PIC) scheme, said KPMG head of tax Tay Hong Beng, quoting latest available statistics announced last November based on corporate tax filings then.

This gels with the picture painted by the Singapore Business Federation's and Singapore Chinese Chamber of Commerce and Industry's surveys. Both showed that the proportion of companies aware of schemes is far larger than the minority that have actually tapped them.

This is in part due to incomplete understanding. 'Education must come first. Productivity and innovation still appear foreign to many SMEs,' Mr Tay said. For instance, some smaller firms think that the PIC - which offers tax benefits for productivity-related expenditure such as equipment purchases or worker training - is meant for high-tech companies. Clearer communication of the complex array of schemes is needed, he said.

But strict qualifying criteria for most of these also mean that many of those in the know are unable to qualify. There is also the 'sandwich class of SMEs' that have outgrown some assistance schemes but could still do with the help, said Mr Tay.

The SMEs at the table had practical concerns. 'It is still too costly for SMEs to fill in all the forms and spend hours negotiating some of these poorly structured programmes,' said Manu Bhaskaran, CEO of Centennial Asia Advisors.

Bogged down by the inherent challenges of running a small firm, many are thus unable to benefit from schemes that require additional outlay first.

'I'm very happy with all these productivity schemes. But, to be very frank, we've not taken advantage of many,' said PropNex CEO Mohamed Ismail. 'To take charge of productivity, you have to put in brains and time and effort. It doesn't come free, so you have to think: as an SME, how much do you dare to put aside?'

The current incentives tend to 'disfavour the services' too, Citigroup economist Kit Wei Zheng said.

Mr Ismail added: 'If you're buying machinery, it's easier to utilise. But if you're in the service industry, there are limitations.'

This complexity is typical of Singapore's fiscal system, whose incentives are 'so micro-targeted' to ensure that no money handed out is used for any purpose other than that intended, observed Mr Kit.

'But in being micro-targeted, they become so complicated and nothing applies,' said Mr Bhaskaran.

Tax schemes can be more innovative too. Mr Tay proposed incentives based not on how much a company spends, but on the value created. 'Why can't we have an independent valuation of the brand name of a company, and offer tax deductions based on the value created?' he suggested.

This would empower SMEs with growth potential with additional cash from tax benefits, he said.

Calls for refinement of existing schemes in recent weeks include suggestions for a higher cap on the cash payout option under the PIC than its current $30,000 and an extension of this option, as well as pleas for the qualifying criteria to be relaxed or expanded.

Roundtable participants also pointed out that some productivity measures - such as the tightened foreign worker quotas and raised levies - have already had painful side-effects on companies that cannot yet reap the gains.

'In the next 1-2 years, apart from cyclical productivity gains, I don't think these will have worked. And, as a result, businesses will face a pretty significant escalation in unit business costs,' Mr Kit said.

While the carrot to drive productivity improvements has been extended along with the stick, the accompanying conditions 'kill the desire to even start' biting, Mr Ismail said. 'And the only thing the SME will say is 'my costs are going up, you're raising the levies'. So that's the difficulty,' he added.

Teh Shi Ning