Speech at Budget Debate On Foreign Worker Levy Changes
Mr Gan Kim Yong, Minister For Manpower, Parliament
Introduction
1. Yesterday, DPM Teo talked about the National Productivity and Continuing Education Council and our strategy on raising productivity to achieve sustainable and inclusive economic growth. I will talk more about MOM's strategy during the COS. But let me just focus on one particular area this afternoon. To make this strategic shift, we are making adjustments to the foreign worker levy to encourage employers to use their foreign workers more efficiently and to motivate them to invest in productivity improvements. I think it is useful to share with Members the thinking behind the levy changes and respond to some Members' concerns about these changes. First, let me thank Members for their comments and support of the changes.
Key Underlying Principles
2. We have taken a calibrated approach in adjusting the levy so as to maintain a balance between supporting economic growth and ensuring that we do not become over-reliant on foreign manpower. As Ms Jessica Tan has pointed out, we must ensure that Singapore remains an attractive place for businesses so that we can continue to create jobs for our workers. That is why we have not reduced the top line Dependency Ratios so that growth companies can have access to foreign workers they critically need to support their operation and expansion. This will also allow us to attract high value new investments that will raise our productivity, spur our growth and create good jobs for Singaporeans.
3. However, we cannot continue to grow our foreign workforce at the same pace we did in recent years. We need to moderate the overall inflow of foreign workers and motivate companies to invest in productivity improvements. To achieve this, starting from 1 July 2010, we will increase levies across the board and adjust the levy tiers. Let me explain how this works. The levy tiers are structured such that the higher a company’s dependency on foreign workers, the higher the levy rate and the bigger the levy bill it will have to bear. For example, a Services company with 10 local workers may employ up to 10 Work Permit holders because the Dependency Ratio is 50% - 10 locals for 10 foreign workers. Let us assume the foreign workers are skilled workers to simplify the example. The first Work Permit holder it employs will be subject to a levy of $160 from 1 July 2010. It will pay $160 levy for each of the Work Permit holder it employs up to a total of 5. That is the first tier. However, the 6th Work Permit holder it employs will be subject to a levy of $300 and the 9th Work Permit holder will be subject to a levy of $450. That is the 2nd tier and the 3rd tier. We will further tighten the levy tiers over the next three years. This way, companies will have a strong incentive to reduce their dependence on foreign workers.
Key Concerns
4. A number of Members, including Mr Liang Eng Hwa, Mr Teo Siong Seng, Mr Sin Boon Ann, Mdm Ho Geok Choo, Dr Amy Khor and Mr Michael Palmer have expressed concern about the impact of the foreign levy changes on businesses, especially SMEs. Let me stress that the levy changes should not be viewed in isolation. They should be seen in the light of the various initiatives and measures announced by Minister Tharman to help companies, especially SMEs, to improve productivity. As DPM Teo mentioned yesterday, productivity is not just about cost reduction and efficiency; it is also about how businesses can create value. I will not elaborate further as MTI will address how it intends to assist SMEs, at a later stage.
5. Ms Jessica Tan and Dr Ahmad Magad have also cautioned that some companies may not be able to implement productivity improvements immediately. Mr Michael Palmer has also asked if we could align the pace of the levy changes to the 10-year productivity target. We understand that companies will need time to adjust. This is why the levy changes will be implemented in steps over three years. The first increase in levy rates on 1 Jul 2010 will be a modest one, ranging between $10 and $30 for most Work Permit holders. This represents an average of less than half a percent of the overall wage bill. But we need to get companies to start thinking about improving their productivity and take steps to reduce their dependency on foreign manpower now, so that they have enough time to realise productivity gains. The longer we delay, the more painful the adjustments will be later.
6. Several Members, such as Mr Teo Siong Seng, Ms Irene Ng, Dr Ahmad Magad, Mr Ong Ah Heng, Mr Sin Boon Ann, Mdm Ho Geok Choo, Dr Amy Khor and Mr Zainul Abidin Rasheed are also concerned that some jobs may be shunned by locals and companies may have difficulties in recruiting enough locals to replace the foreign workers. Let me clarify that the aim of the levy changes is to motivate companies to increase their productivity and deliver higher value-added products and services with fewer foreign workers. The increase in levies alone will not necessarily lead to productivity improvements if companies merely replace foreign workers with locals and employ the same number of workers. Let me borrow a phrase from my colleague Mr Lim Swee Say: "With same same input and same same output, productivity will remain same same, with no real improvements". Companies should consider how they can streamline business processes, improve their products and services, explore new markets with higher value and upgrade the skills of their workforce. This way, they will see real productivity gains.
7. Mr Low Thia Kiang has suggested that we remove the foreign worker levy completely and use Dependency Ratios instead as the sole lever to control the foreign worker numbers. Let me explain why we need the two levers – Dependency Ratios and foreign worker levy – to work in tandem to moderate demand for foreign workers and allocate them efficiently. If we use Dependency Ratio alone to regulate demand for foreign workers, we will need to reduce it significantly. I have earlier explained why this could impact high value growth companies and new investments that may require foreign workers. The challenge is how we can support these high growth companies and new investments without increasing the total number of foreign workers here. The issue is therefore one of allocation. We want to encourage companies which can operate with fewer foreign workers to reduce their dependence, while those who need more will have to pay a higher levy rate but still keeping within the overall Dependency Ratio requirement. I have illustrated earlier how the levy works to achieve this. If we only have a Dependency Ratio system with no levy, it would not make much of a difference to a company, like the example I gave just now, whether it hires one foreign worker or 10 foreign workers. In the end, most companies may well decide to hire as many foreign workers as they can, right up to the limit of their Dependency Ratios. This will be contrary to our objective to moderate demand and facilitate efficient allocation of foreign manpower resources.
8. Therefore, as Mrs Josephine Teo has pointed out, the Dependency Ratio system requires an accompanying pricing mechanism to allocate foreign workers. Mr Low has initially suggested adjusting the Dependency Ratios by industries to achieve this. The question is how can the Government be in a position to decide which industries are more deserving of foreign workers? For example, how do we determine whether Pharmaceutical industry requires more or fewer foreign workers than say, the Food industry? Even within the same industry, Food & Beverage, for example - how do we decide whether a coffee shop requires more or fewer foreign workers than, say, a French restaurant? So instead of the Government making decisions on the number of foreign workers in each industry, each business, and each company we should leave it to market forces to do that through a pricing mechanism. In fact, Mr Low conceded as much when he subsequently suggested a "COE" system to allocate foreign workers, which, in fact, is another form of pricing mechanism. However, a "COE" allocation system for foreign workers is fraught with many difficulties. For one, it creates uncertainty for employers in terms of price and availability of foreign workers. The "COE" system would be no simpler than the levy system and could end up creating other problems.
9. Sir, the foreign worker levy is a pricing mechanism that works in tandem with the Dependency Ratio. Together, the system gives flexibility to companies so that they can have access to foreign workers but they have to hire locals to meet the Dependency Ratio requirement. They have to pay higher levy rates if the ratio of foreign to local workers is high. This way, we allow market forces to operate so that we can efficiently allocate foreign manpower resources, give enterprises some flexibility while motivating them to improve productivity and minimise reliance on foreign workers. It is not a perfect system but it is a practical system.
10. Mr Michael Palmer has asked why we are increasing the S Pass levy by a higher amount than the Work Permit levy increases. Sir, since the introduction of the S Pass in 2004, the number of S Pass holders has grown more rapidly than any other work pass group. Although S Pass holders are considered mid-skilled workers, they are still part of the foreign worker landscape. The S Pass levy has remained at $50 since 2004 and is currently significantly lower than the Work Permit levy. We will need to increase it to moderate demand. I should also point out that S Pass holders are expected to receive higher wages to qualify for S Pass. The new levy rate is still a relatively smaller proportion of the S Pass holder’s wages compared to that of the Work Permit holders.
11. Ms Irene Ng, Ms Audrey Wong and Dr Amy Khor have raised the concern that errant employers may exploit their foreign workers by passing the levy increases on to them. Sir, current Work Permit and S Pass conditions explicitly prohibit employers from recovering levies and other employment-related costs from their workers. MOM will continue to monitor and take enforcement actions against employers who attempt to do so through salary deductions and kickbacks.
Conclusion
12. Sir, let me reiterate that the levy changes should not be seen as a standalone measure to moderate the growth of foreign manpower, as Mr Inderjit Singh has pointed out. Instead, it is part of the overall coordinated efforts by the Government to strive for productivity-driven growth. As Mr Heng Chee How has mentioned, companies will need to change their mindsets on the way they use their foreign workers and drive productivity improvements.
13. Sir, let me end by sharing a short story. One day, a teacher went into a classroom with a big jar. First, he put some rocks into the jar and asked the students, "Is the jar full?" So, when the rocks were piled up, the students said, "Yes it is full." The teacher then picked up a box of pebbles and put the pebbles into the jar, and asks the students, "Is the jar full?" The students said, "Well, I think it is now really full." But to the surprise of the students, the teacher now took up a box of sand and poured it all into the jar. Then, the teacher asked the students again, "So what do you say? Is the jar full?" The students now became very hesitant, but after a while, they conceded, "I think it is quite full". Now finally, the teacher took up a cup of tea and poured it into the jar. And now, when the teacher asked the students, "Is the jar really full?", there was dead silence.
14. Sir, I talk to companies on the need to moderate the demand for foreign workers and raise productivity. Some claim that it is not possible to improve their productivity any further. They say, “My jar is full.” Those who always think that their jar is full will not make efforts to fill it. But they are surprised every time when others manage to fill it up further.
15. Sir, of course productivity improvement is much more challenging than filling a jar. We should not underestimate the challenges of productivity improvement, but neither should we underestimate its potential. Sir, let us stay focused and work together to find more ways to fill the jar further.