Committee of Supply – Head M (Ministry of Finance)

Mdm Chair, I thank the Members for their thoughtful comments and questions for the Ministry of Finance. My colleagues from MTI spoke yesterday about measures to support industrial and SME development, and to raise incomes through

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quality growth. In fact, a whole-of-Government approach is needed to meet both economic objectives and social objectives. MOF's policies and initiatives thus complement the efforts of MTI and other Ministries to create an enabling environment for businesses to thrive and to meet the needs of our citizens.

I will organise my response to Members' cuts around two themes: first, supporting economic transformation and SME growth; and, second, strengthening Government effectiveness. I will then deal with tax incentives, reliefs and our reserves.

During the Budget debate, we have heard how SMEs can continue to participate meaningfully in our economy. In fact, SMEs have also had good access to Government procurement, which is a question that Ms Jessica Tan had asked.

In 2013 alone, about 80% of all Government tenders – and these refer to contracts valued above $70,000 – were awarded to SMEs. In terms of contract value, this was about 50% of contracts awarded by the Government. It is higher than the target of 25% share of Government spending that, as Ms Tan had shared, the UK has set for its own SMEs.

More significantly, SMEs were successful in tendering not just for smaller projects, but fairly sizeable ones. For example, of the 1,100 or so contracts valued between $1 million to $50 million that were called last year, SMEs won about 80% or 872 of them. In the construction sector, when we look at projects with contract values between $50 million and $100 million, SMEs clinched 60%, or 19 out of 31 projects, in 2013. SMEs have had good access to Government procurement.

However, there is scope to help SMEs, in particular, smaller SMEs, take on more or larger projects. For instance, in the IT and telecommunications sector, SMEs won 60% of the tenders award, which collectively accounted for 40% of total contract value. We intend to do more to focus our help to nurture Singapore tech start-ups in the IT sector and, at the same time, achieve better outcomes for the Government. MCI will be addressing this in their Committee of Supply response.

Madam, in the Budget roundup speech, Deputy Prime Minister Tharman had explained that the PIC is a broad-based scheme that we have deliberately

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kept simple to support as many businesses as possible in the productivity drive. To help SMEs, we will make PIC claims easier and process them more quickly.

First, they will get help to avoid common mistakes when applying for the PIC cash pay-outs. And this will be done through a web-based application form that provides built-in validation checks. In other words, even before they submit their claims, the application process will indicate to them how they can avoid common mistakes.

Second, from early next year, IRAS will be able to process most claims within two weeks, compared to three months today. From early next year, IRAS will be able to do it in two weeks for most of the claims. This is because they are improving their processes and, by then, businesses will get their PIC cash pay-outs with less paperwork and in a shorter time.

Many SMEs apply for PIC themselves, without using consultants because it is a fairly straightforward process. Businesses which need help can attend PIC seminars or sign up for PIC clinics which offer free one-to-one consultation sessions with officers from IRAS and through the SMEs centres which Minister of State Teo Ser Luck has talked about yesterday. He also provided all the telephone numbers and contact details.

The PIC covers a very broad range of activities. It is unlike SPRING's Innovation and Capability Voucher Scheme which is designed specifically to help micro and small SMEs to take their first step in capability upgrading with the support of external consultants. To keep things simple for such SMEs, there are pre-selected modules and pre-qualified consultants for SPRING's ICV Scheme, but not the PIC, given its much wider support for businesses and activities. By having a list of accredited PIC consultants, as suggested by Ms Tan Su Shan, or even accredited PIC vendors, this will make the PIC more restrictive than necessary. So, we will take a practical approach. Where it makes sense, we can have a pre-qualified list of consultants or vendors, but where it would be restrictive if we had introduced such a pre-qualified list, we would leave it open to the businesses.

Ms Tan asked if the eligible list of equipment was adequate. In fact, it covers more than 90% of PIC equipment claims. The list is regularly updated based on feedback from businesses and trade associations. In the past two years, we have included new sector-specified automation equipment for sectors, such as F&B, construction and cleaning. Businesses with equipment not on the prescribed list fill in a one-page form. IRAS has approved a vast majority of

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these applications and 80% of them within three weeks. To require an independent expert body to assess the claims would complicate and lengthen the process.

Besides the PIC, there are many other schemes which support SMEs. However, a common feedback is that SMEs have difficulty figuring out which ones to tap on for their particular needs. The Government processes more than 127,000 grant applications by businesses annually. There is scope to streamline grant criteria and to make the application process friendlier. We can also auto-populate common data fields using previously submitted data, for example. MOF and MTI are working with our agencies to improve the accessibility of these schemes. This is a complex exercise as it requires a fair amount of streamlining and standardisation across several agencies, but it is a worthy exercise as it will improve the productivity of businesses and will enable the Government to do better to meet the needs of SMEs.

Mr Liang Eng Hwa asked if we can further reduce the corporate regulatory and compliance burden on SMEs. Our corporate regulatory environment is considered pro-business with rules that are effective and not excessive. Since 2007, Singapore has been ranked first on the Ease of Doing Business Indicator which the World Bank's Doing Business Report, when it is published, indicates.

And we can do more for our SMEs. First, when the Companies Act is amended later this year, more companies will be eligible for audit exemption. Currently, an estimated 200,000 companies enjoy audit exemption. With the change, another 25,000 companies – almost all SMEs – will qualify for audit exemption as well. And this will mean savings amounting to several thousand dollars each from the audit fees that they would otherwise have had to pay. Now, this does not mean a loosening of governance and accountability, and existing safeguards will still be retained, such as requiring all companies to keep proper accounting records.

Second, tax filing has been simplified for micro companies with revenues of one million dollars or less. They can also file their returns electronically, thus reducing paperwork. These companies do not need to submit their financial statements and tax computations unless required by IRAS for audit purposes.

Madam, let me now address Ms Jessica Tan's question about strengthening Government effectiveness. It is an important question because an effective and high-performing Government is needed to prioritise and utilise resources optimally. As a central Ministry, MOF plays a key role in bringing this

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about. I will share two sets of initiatives.

The first is crowd-sourcing. The World Economic Forum conducts an annual ranking of ICT usage and readiness amongst governments. Singapore has consistently been ranked amongst the top three, out of 140 economies. But we recognise that we can do more. The Government is pushing for a more pervasive use of data analytics. In fact, some agencies are already doing so. For instance, LTA uses data analytics to better manage crowding on public buses. It is through the mining of fare card data that has allowed the LTA to pinpoint which segments of a bus service are most crowded, down to 30-minute intervals. This has helped the LTA to plan for the introduction of the Peak Period Short Service which has eased over-crowding on certain services when the crowding situation is the most severe.

We agree with Ms Tan that there is, indeed, room for more agencies to mine data more intensively and there is also a rich diversity of experiences amongst our citizens that we should draw on to improve delivery of public services.

Several of our agencies have, in fact, started crowd-sourcing competitions to catalyse ideas from the public. One such platform is the Apps4SG Competition, co-organised by MOF, IDA and Singapore Land Authority. Last year, we received close to 90 submissions of new apps or online services to improve the way we live and work in Singapore. One of the finalists was a pair of siblings, Hairul and Shireen who proposed an app called FundWagon. Leveraging on publicly available Government data, the app promotes crowd-sourcing of donations, by matching interested donors to specific projects of non-profit organisations. Another example is the HDB, which has been organising competitions since 2011 to crowd-source "cool ideas for better HDB living".

To proactively reach out to partner more citizens, MOF will launch a prototype of a whole-of-Government crowd-sourcing portal called e-Citizens Ideas. This will be done by April. e-Citizens Ideas will bring all such crowd-sourcing competitions in the Government together to make it easier for citizens to participate.

The second set of initiatives to strengthen Government effectiveness focuses on procurement. I agree with Ms Tan that tightening procurement practices to the extreme can be counter-productive. A balanced approach would require equal emphasis on robust rules, supervision and top level oversight, as

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well as investing in the capabilities of the procurement officers.

Last year, I spoke about plans to professionalise the procurement function. We will launch the Procurement Specialist Track by September this year. This will send a clear signal to more than 2,000 procurement officers across the Public Service of our commitment towards their capability development. With the launch, there will be more structured development opportunities and career pathways.

The Procurement Competency and Training Framework will also be enhanced. Currently, all procurement officers undergo mandatory basic training on Government procurement principles and rules. We will introduce mandatory continuous training to ensure that skills are deepened as the procurement officers progress in their careers. Besides developing the capabilities of individual procurement officers, the Government can build up expertise in specific domains and share it systematically across agencies so that we can all be smarter buyers. For instance, IDA will deepen its expertise in developing complex IT systems, agile digital services and data science. This will help other agencies tapping on IDA's expertise to procure the right technologies that will improve service delivery and policy implementation.

Madam, let me now turn to tax incentives and reliefs. Ms Tan Su Shan and Mr Yee Jenn Jong raised concerns that the bar for qualifying R&D activities was set too high. Madam, our R&D definition is similar to that of other jurisdictions, such as the UK and Australia. To facilitate businesses in their R&D claims, we have issued a note on the criteria, as well as the qualifying R&D activities, taking into consideration the practices in other jurisdictions. In addition, IRAS has established a Technical Advisory Panel, comprising academics and industry experts in the fields of Science and Technology, which it can tap on for advice in the evaluation of R&D applications.

We agree with Ms Tan that rules should not be set up to deter risk-taking of any kind. We are working with tax agents and relevant economic agencies to review the R&D note, to provide more helpful guidance to businesses. This new note will be ready by June.

Mr Yee Jenn Jong called for a review of two schemes, the Mergers and Acquisition Allowance (M&A) and Life Insurance Relief. The M&A scheme was introduced in Budget 2010 and enhanced in Budget 2012 to help defray the cost incurred by companies undertaking M&As. Sixty-seven companies have benefited from the scheme thus far, of which 50 – which is about 75% – are

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SMEs. More than three quarters of the tax benefits in Year of Assessment 2013 went to SMEs.

The M&A scheme's main purpose is to promote restructuring through consolidation amongst SMEs. Therefore, the requirement is that the acquiring companies must take a controlling stake in the target companies, which can include acquisitions taken in smaller steps over a 12-month period – restructuring does not have to be just a one step to achieve the controlling stake but it can be smaller steps over a 12-month period. It is not catered to companies acquiring parts of a business operation, such as plant and machinery or intellectual property rights. Such asset acquisitions already qualify for other tax deductions or allowances, for instance, under the PIC.

The M&A scheme is due to expire in March 2015. We will take on board the feedback and useful perspectives provided by Mr Yee and others when conducting the review.

The Life Insurance Relief is claimed by fewer than 10% of individual taxpayers, so Members may not be familiar with it. It has been around since colonial times and catered to people who bought life insurance as a form of retirement savings. In 1955, we introduced the CPF, and that provided citizens with a dependable form of retirement savings. As part of the Government's support, taxpayers enjoy tax relief for their mandatory employee CPF contributions.

However, the Life Insurance Relief has been retained as a concession to those who are not required to contribute to CPF, or who have low CPF contributions of less than $5,000 per year. The cap of $5,000 for life insurance premium relief is not low. Based on current information, more than 60% of the claimants were not affected by the cap. In fact, there are three-quarter million, or 40% of CPF contributors, with less than $5,000 in mandatory employee contributions. These will, thus, enjoy tax reliefs of $5,000 or less.

We have no immediate plans to increase the cap for the Life Insurance Relief cap. To boost retirement adequacy, our focus is on strengthening the CPF system. Tax relief is available for voluntary contributions by self-employed individuals, as well as for the topping up of Retirement Account or Special Account under the CPF Minimum Sum topping-up scheme.

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Madam, let me now turn to some very important questions that Mr Inderjit Singh has posed regarding our reserves and also CPF. First, Mr Inderjit was concerned that we may be spending too much from our investment returns and asked if the returns would be sufficient to prevent a decline of our reserves. The Net Investment Returns (NIR) framework allows us to tap on the investment returns of our reserves for budgetary spending in a sustainable way. Under the framework, the Government can only spend up to 50% of the long-term expected real returns from the net assets managed by GIC and MAS. Hence, what this also means is that 50% of the expected real returns are retained in our reserves, ensuring that it is not de-cumulated over time.

Our Government spending needs will increase over time but that should not drive the investment strategies of GIC and Temasek. They must continue to invest with the aim of achieving good risk-adjusted returns over the long term. So far, they have achieved this. If the Government is in need of more revenues besides that attainable within the NIR framework, the solution is not for our investment entities to take more risk in the hope of higher returns. The solution has to rest on our budgetary measures, not the investment strategies of GIC and Temasek.

Mr Inderjit also asked if the interest rate of 2.5% for the CPF Ordinary Account is fair and how it compares with other systems. Let me first highlight a few points that have to be borne in mind when comparing CPF returns with those in other systems.

First, for the purposes of long-term savings, it is not appropriate to look at the Ordinary Account, or OA, rate alone, as most CPF members use the OA account mainly for home purchases. If we look at the Special Account, the SA, and the Retirement Account, the RA, that are invested for the long term, the interest rates are higher. Members can also choose to transfer monies from the OA to the SA. The SA, which is for long-term savings, pays an interest rate of 4% currently. Further, we pay an extra interest of 1% for the first $60,000 of CPF balances.

A second point to bear in mind is that the returns on any financial instrument have to be viewed in the context of the performance of their domestic currencies over time. Interest rates are typically higher in countries whose currencies have tended to depreciate over time because higher interest rates compensate for weaker currencies.

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A third factor is that many pension funds abroad, especially in emerging markets, are predominantly invested in their domestic capital market and take on the risk of the equities and bonds that they are invested in. For such pension funds, the returns that can be expected by members will depend mainly on the performance of the domestic market. Unlike many other pension funds, the CPF system does not expose members to market risks. The CPF monies are invested in risk-free Singapore Government securities. Their value is assured as they are guaranteed by one of the few remaining AAA credit rated governments in the world. Regardless of when CPF members retire or the state of the financial market when they retire, their CPF monies are safe.

In many pension funds abroad, there is a promise of higher returns. But depending on when you retire and the state of the financial markets at that time, your pension withdrawals can vary quite significantly. In our system, with the CPF monies being invested in Government securities, it is the Government that bears investment risks. And what does this mean?

The Government's assets that back its liabilities to the CPF include those managed professionally by GIC in particular. GIC invests in a widely diversified global portfolio with the aim of obtaining good long-term returns. GIC has, in fact, delivered creditable results over the long term. However, over the short term, returns can fluctuate widely, depending on global market cycles and shots. This is, indeed, what happened during the global financial crisis when the global markets fell sharply. GIC's returns during this recent period were, hence, much lower than what the Government paid the CPF and, in turn, what the CPF paid its members. GIC's returns over five, 10 and 20 years are presented and explained in its annual report. Temasek also publishes, each year, extensive information on its performance.

The basic point, Mdm Chair, if I could summarise, is that unlike many pension funds, our CPF system does not expose members to market risks. It provides a fair return for the majority of Singaporeans who would not want to be exposed to high levels of investment risks. Those who are prepared to accept higher risks in the hope of potentially higher returns can already invest through the CPF Investment Scheme although, in doing so, many have found their investments not performing better than the returns offered on the Special Account.

Madam, we have achieved good returns from the GIC over the long term but, over the short term, its exposure to local markets can mean that its returns fall short of what the Government pays the CPF. The Government takes the risks, not CPF members. As I have explained earlier, investment returns that we

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expect to make by taking this long-term view and, bearing the risks of investments, are not hoarded away in the reserves. Fifty percent of the returns from our reserves flow back to our annual Budget. The long-term returns, therefore, help to fund spending, which benefits our citizens.

Mr Inderjit asked if giving higher CPF returns will be better than sharing benefits through Government transfers. The CPF system, with its risk-free returns, together with our fiscal transfers, is a fair and equitable approach for our citizens in the long run. Unlike most pay-as-you-go pension systems, our CPF system is designed to be sustainable. There are no inter-generational transfers. Instead, CPF contributions are personal savings and members withdraw their own savings.

However, the Government systematically tops up the CPF savings of the lower income. We do this through Workfare, housing grants and other schemes. These top-ups are all borne by the Budget as explicit fiscal transfers. So, the main responsibility for progressivity is placed on the fiscal system.

Mdm Chair, we have and will continue to adapt our system of CPF and social transfers that are borne by the Budget to suit our changing circumstances and needs. Mdm Chair, I thank all Members once again for their cuts and thoughtful comments for MOF.