Calling for a New Framework to the Provision of Social Goods and Services

Introduction

At an individual level, spending on public goods (which includes public housing, public utilities, public transport, public healthcare…etc.) constitutes an average of 80% of one’s total life expenditure.  In the early years of modern economy, based on economy of scale and monopoly nature of public goods, government attempted to provide these public goods.  Unfortunately, governments worldwide failed to provide public goods efficiently through the Nationalisation policy.  The world’s advanced economies then swung to the other extreme, delegating the task fully to the private enterprises through the Privatisation of public organisations or statutory boards, where these public organisations are incorporated as private companies with their ownership shares sold to the general investors.  Once, it is a privatised company, its primary objective is profit maximization for its private share owners.  Privatisation was first initiated by former UK’s Prime Minister, M. Thatcher in 1983 for Great Britain, which was subsequently adopted by many advanced economies, including Singapore.  After thirty over years, privatisation policy only produced limited success, failed to lower costs or improved efficiency significantly due to the inherent market nature of public goods; economy of scale and monopoly. Unfortunately, the Privatisation’s market asymmetry of information on costs and possible alternative options will continue to disadvantage the public consumers.  To-date, no new or improved policy framework has been developed to correct the inefficiencies of the two extreme approaches.

At the national level, the efficiency of providing public goods also affects a country’s performance directly and indirectly.  One example of direct effect may be in a form of national electrical power outage, triggering stoppage of businesses and possibly damaging also the production output.  Example of indirect effect can be in a form of delay in public mass rapid transport (MRT) service due to power failure.  Due to the delay, workers will end up being late for work, thus disrupting businesses, affecting efficiency.

In fact, public goods should be termed as Social Goods[1] as these public goods that could be delivered as private goods, though these goods were previously provided by the government for various reasons; maximize social level of production at lowest cost, national security, social policy and using public funding, like taxes and revenues from corporates and individuals.  From here on, the term of social goods will be used.  Examples of social goods are public housing, water, gas and electricity.  Social services are public healthcare, education, transportation, and telecommunication. 

As social goods provision constitute the largest economic activity and affecting one’s nation economic performance significantly, it calls for urgent review of privatisation policy as the latest privatisation approach has failed to deliver the optimum performance expected. 

To fully appreciate the conceptual development of social goods provision, we start off with the understanding on why in the early years, the government called upon herself to provide the social goods, followed by looking into why the attempt by the government to provide public goods failed.  Despite the introduction of the Privatisation policy that is supposed to overcome the earlier government provision failure, it did not achieve the expected success.  By looking at all the key factors affecting the two approaches, a new effective approach may be developed to optimize the provision of social goods.

There are three main considerations in the provision of social goods namely; the monopoly element in these markets, the significant externalities that arise from the provision of these social goods (positive or/and negative types) and the effects on national interests, besides the normal business consideration of productivity, cost effectiveness and profitability. 

One main factor that gives rise to the monopoly is due to the markets’ nature of these social goods.  These markets require large upfront investment in the infrastructure with long payback period so as to take advantage of the economy of scale in production.  If privatised, the duplication in almost identical infrastructure investment by multiple enterprises will greatly reduce the return on investment for both the existing and the new entrants, thus making it a non-viable business proposition for all.  For example, the current electrical power cable network and system throughout the country has been put in place by the existing power supplier.  Should a second firm seeks to enter the power supply market after privatisation, it will be a massive and costly investment while at the same time, it is very difficult to win over customers from the existing power supplier as the price has to be lower, since there is no significant product differences for the power supply offered.  Even it succeed in winning over some customers through price discounts, the profitability of both firms will be compromised, due to excessive investment given that there is no change in the total number of customers in the same market.  At the same time, many private enterprises may have overlapping coverage of the market which leads to redundancy.   Should the firms keep to their niche areas, the efficiency will be greatly reduced due to demand fragmentation.  One example would be the cable TV network service, where Starhub do not allow other firms to distribute their videos on the cable network, thus leads to demand fragmentation.  Due to the monopoly nature of social goods, governments in the early years took upon themselves to provide the social goods.  To better appreciate the issue, the economic analysis provided below helps to illustrate clearly the issue of monopoly versus the social optimum level of production (or perfect competition state) business outcomes.

Monopoly verses Social Optimum Output[2] Chart

The economic theory of demand and supply, and optimum production level remains a useful tool in analysing the optimum allocation of resources in the provision of social goods (and services).  As shown in the above chart, to maximize profit, a privatised monopoly firm  will not produce beyond Qm (monopoly level), much lesser than Qs, a socially optimum level (or perfect competition level) where maximum possible goods are consumed at much lower price. 

Under a Monopoly condition, the monopoly firm suppresses the output to raise price from the optimal social production level to monopolist level so as to achieve their own profit maximization goal.  As a result, the classical economics calls for government provision of these social goods so as to enhance output to optimal social level.  Unfortunately, due to the lack of competition, and lack of motivation of civil servants to be measurably efficient in their efforts, it ends up increasing the costs of production which again results in lower level of output from the optimal social level. 

Neo-classical economists went to the other extreme in calling for full privatisation of the social goods business as a better alternative to the government-run organisation[1].  Private organisation seems to achieve higher efficiency in the business process, thus allowing higher level of production at lower costs, boosting the output level higher from the government operated organisation, but NOT anywhere close to the optimal social level, given their primary motivation of profit maximization.  The key weakness of Privatisation is that it ends up as oligopoly market where only few firms operate.  Oligopoly has similar monopoly market behaviour where these firms tend to produce and price their goods at the level similar to a monopoly.   The advantage of oligopoly market is there is competition between these few firms, which tend to lower their costs of operation, which often translates to slightly lower price than a monopoly market.  Nevertheless, it is still far from the optimal social level of production.  Privatisation also allows the widening of income gap as the private owners of the monopoly or oligopoly firms enjoy super-normal profits or commonly known as rent seeking profit.  The moral hazard thus arises from this skewed reward in favour of the owners of monopoly or oligopoly firms. The underlying cause of Privatisation failure is that oligopoly or monopoly market structure still prevails in the so call privatised social goods markets, even though it was disguised as having market competition.   In the case of Singapore, the majority owner of these oligopoly firms is the same entity, which effectively, a monopoly owner.  In the case of the three main telecom companies in Singapore, the majority owner is the same entity, Temasek Holdings.

The new framework calls for a vertical disintegration of social goods business process

The proposed new framework in this paper calls for a vertical disintegration approach to the whole business process in the production of social goods, that is, to break-down the components of the business process (which starts at management planning of the business to manufacturing and maintenance, to distribution followed by sales service) to meet the demand of the monopoly market.  There is only a certain component that is essentially monopoly by its market nature.  The new framework seeks to provide the rationale that the monopoly component should be invested and owned by the government while those components of business process that are not monopoly in nature, should then be privatised so as to enhance the efficiency.  Due to the privatised components, it will also pressure the monopoly component to match up to the privatised level of efficiency, resulting in total efficiency of the full business process reaching its optimal social level.
 

One good example is the privatisation of Singapore’s energy market operator, which was previously owned and operated by Public Utilities Board, PUB.  In their privatisation exercise, PUB, now known as Energy Regulatory Authority, retains only full ownership and maintenance of the power grid and sales services, while the production of electricity was privatised, resulting in three privately-owned power stations in Singapore.  These three power producers compete to offer the lowest rate of energy charge to the whole Singapore market.  Recently, further privatisation of the sales function has been implemented.

The key issues relating to the components of Providing Social Goods and Services to the public:

1. Infrastructure investment
2. Infrastructure ownership
3. Core versus the non-core infrastructure
4. Infrastructure operations
5. Infrastructure maintenance

To add rigor to the evaluation process of what can and what should not be privatised, we have to return to the economic theory of incentives, or in business management term, adopting efficient and effective decision process and also the issues that may arise due to the interactive nature of each of the business processes or term here as business components.  Key factors in business or economic decision making that ensure efficient and effective outcomes:

1)    Highest motivation to make the best economic decision that achieve highest efficiency

2)    Best position and ability to access and assess the changing demands information

3)    Best skills to execute and manage the operations

4)    Best in minimizing negative or/and maximizing positive externalities

5)    Technological advances that can obsolete existing network or services

6. Neutralising Monopoly or Oligopoly nature of pricing
7. The positive and negative external economies of the infrastructure
8. National interests and security

Motivation Factor:  Civil servants in charge may not have the best motivation as generally civil servants’ self-interests are often to keep things status quo and also to avoid mistakes in making changes.   Fortunately, these days, due to the active citizenry, the failure to keep up with the changing demand will trigger unhappiness of the civil bodies, holding the government in power accountable for the short-comings.  As such, the government will put pressure on the civil servants to live up to the standard of efficiency expected.

Best informed Factor:  The ability and the motivation to predict and assess the demand for the infrastructure services are key in ensuring the effectiveness of the decision.  Government in their urban planning is best positioned to anticipate the changing demand for the infrastructure goods as they have access to the changing population locations. 

Best Skill Factor:  Due to the specialised nature of each of the social industries, there will be limited availability of trained personnel and training program geared for the specific social industry.  The challenge is to recruit and train personnel for the task.  Each specific social industry may require specially organised training so as to achieve optimal efficiency.  On the other hand, those components of the business process that are privatised usually do not require specific training.  General training will be sufficient to achieve optimal level of efficiency, for example, sales training where sales skills are generally applicable to any other industries.

Technological advancement and obsolescence:  In certain social industry, technology may not be evolutionary.  When there is technological quantum leap, the social goods may be best produced using the new technology, but under private monopoly, the obsolescence cost may be too high to write off, thus keeping the social goods provisions under continued sub-optimal level.  As government will be able to write-off using public resources and take the leap, social goods will then be ensured to be produced at new higher optimal level.

Neutralising Monopoly or Oligopoly pricing nature of the market:  Due to the likelihood of the market, there is a need to maintain transparency and productivity, one of the companies in the market has to be majority-owned by government.  This will allow the government-owned company to be able to price the goods that are truly cost neutral (where capital is also priced in as costs of production) so as to suppress oligopoly pricing.  At the same time, the private companies operating in the same market will also challenge the productivity of government-owned company so as to ensure no “civil servants” mentality creeps into the business processes.

Positive and Negative Externalities:  As government will be able to assess these factors, she also has the power to introduce laws and regulations so as to reduce or offset negative externalities.  As for positive externalities, government is to capture the benefits and reinvest into the related infrastructure and to bolster the government revenue.   

National Interests:  For the critical industry or market of social goods, there is a need for board representation, either by relevant regulatory body or through limited ownership by government investment arm into all these private companies.  This is to ensure the government is well informed in advance of any possible compromise to national interest or security.  In the case of limited ownership, there will be a pressure for government to yield maximum profit which threatens to original objective of pure oversight of national interests.

Social Goods & Services Chart

The framework seeks to answer to the question of which business component of each of the chart above that should be privatised or kept in public ownership.  For each cell of ???, we will use the most effective decision making/investment criteria to evaluate and decide on the appropriate operations; private or public?.

In the subsequent sections, the article will apply the above framework with current Singapore’s social goods provision situation.

Since most advanced economies have gone through with privatisation of the social goods provision, the challenge is how the country is to regain control of the monopoly component of each of the social goods market the government has sold out.  By nationalising these privatised companies, it will create a bad precedence and will dent the investors’ confidence in the government handling of the economy.

By making an offer to buy the critical business component from existing privatised social goods companies, the government will threaten the privatised companies’ business viability, taking away their key competitive advantage.  As such, they will not sell at normal market price, but at exorbitant level, which may not be in the national interests to buy at such an exorbitant price.  It may be worthwhile for the government to look into technological leap phase of the social goods production where government new investment will justify the higher returns from the investment from simply buying old technology at over-valued price from the existing privatised companies.

---

[1] http://en.wikipedia.org/wiki/Public_good

[2] Social Optimum Output is at the Perfect Competition Level where there are many suppliers and consumers such that none of these individuals is able to influence the market.  They are also known as price takers, accepting the price level establish by the market.

[3] https://mises.org/journals/rae/pdf/rae10_1_1.pdf criticise government inefficiency in provision of public goods

Sgp public transport needs vs Private operated transport companies

Despite the high profits reported by the two main transport companies;
SMRT and Comfort Delgro, our Transport Minister said that this year
MRT and bus fares must be increased so as to 'encourage' the transport
companies to improve their efficiency.  In the meantime, energy costs
has drop by more than half since early 2014.

The main argument by the Minister is that it is the rental of the MRT
shop spaces that generate the profitability while the MRT operation is
suffering an operational loss.  As such, fares have to increased so
that the MRT operational loss can be reduced.  On the other hand, if
it is not for the MRT operation, the MRT shop spaces will not be able
to achieve the high rental profit.  In economic term, these are the
positive externalities that the shop spaces derived from the MRT
operation.  Beside the shops around the MRT stations, the land prices
around the MRT stations also rise significantly.  In short, the MRT
stations greatly enhance the value of these surrounding land and MRT
shops' spaces.

If these private companies, operating as virtually monopolies (no
alternative supplier), are allowed to make extra ordinary profits from
these positive externalities without contributing to the operational
costs of the MRT, then these companies are ripping off the MRT
commuters who are paying almost full price for the MRT operating
costs.  Why should the public commuters be paying the full costs of
the MRT operations while the MRT positive externalities are creamed
off by private companies that also own the MRT shop spaces?

At the same time, how can Singaporeans be sure of these transport
companies optimum  operating performance when there is no yearly
publication of comparative studies of similar operations and business
environment, example, HongKong MTR operations in term of service
reliability, frequency, timeliness,...etc against the fares charged?

PME's levy to level the playing field between locals and foreigners

When I was General Manager of a local IT company, and subsequently, as Financial Controller for a Dutch MNC, my preference was for foreign mid-level staff (Professional, Managerial, or Executive level, PME) for obvious reasons:

1.  The company did not need to pay for the CPF contribution for foreign staff
2.  Their salary expectations were also lower
3.  Their skill sets and experiences were about the same as local Singaporeans
The total cost differential between local and foreign staff was PME 20% to 40% 

For an Asian foreign worker with University degree and has work experiences, he would clearly have a goal to make SGD 200k or more  and with these earnings, he can easily afford a 2-3 bedroom apartment in the city or suburban area of his own country.  He would also want to own a family sedan car (VW) that may cost around SGD22K.  In Singapore, SGD200K would only allow a Singaporean with the same qualifications to buy a 2-bedroom HDB apartment at the outer-most corner of Singapore like Woodland or West Jurong.  A family sedan car would set a Singaporean back by SGD120K.  The normal medical operation cost for a foreign worker in his home country would probably be around SGD 3k compared to Singapore medical costs of around SGD 15k.

Back in their own country, the foreigners' cost of living is so much lower.  Hence, he is definitely happy to work for SGD3K to 5K a month which means that within 10 years, he would be able to buy his dream home, car, and accumulate enough money to pay for all his necessary living expenditures and lifestyle.  As for a Singaporean graduate earning SGD4K a month, his family would hardly survive as he would be trying to keep up with the ever inflating house, food, transport, education, medical and miscellaneous costs.

As a Singapore PME with university education, it doesn't make sense that while our fellow foreign PME colleagues have bright future ahead by working in Singapore, Singapore PMEs get cornered into 2-bedrooms HDB flats and struggling to keep up with the living expenses.  There are exceptions whereby local Singapore PME get into strong sectors like banking, oil, medical or other "super normal profit" industries and due to the attractive packages offered in these industries, the relative costs become insignificant.   As for the rest of the locals, life is a struggle.  

When it comes to employing maids, a levy is imposed, but when it comes to foreign PME, there is no such 'tax' so as to balance off the differential in the cost-of-living with the foreign countries.  No wonder foreign PME staff are replacing local PME at an increasing rate over the last few years until only last year where tighter restrictions are imposed.  At the moment, the local PME retrenchment rate is still at high level as employers simply employ foreigners to substitute for locals due to much lower costs.

The replacement trend of locals by foreign PMEs will not affect the IRAS income tax collection in the short term, but over medium to long term, it will weaken Singapore's economy as local PMEs being not employed for too long will become the structurally unemployed as they will loss their skills and employ-ability. 

The Government has argued that if Singapore impose restrictions to employ foreign PMEs, the Singapore economy will suffer as companies will move to other countries that has lower PME labor costs.

On the contrary, companies that are established in Singapore will not move out of Singapore just over one cost factor, a foreign PMEs levy. Singapore offers many benefits to companies as compared to them operating elsewhere:

1. Low corporate tax rate; Singapore is amongst the world's lowest corporate tax country

2. Efficient infrastructure; air and sea-ports, robust utilities' services and infrastructures.

3. Clear and effective business laws and regulations 

4. Safe business environment; no burning of factories, labor strikes, riots, political risks, ...etc

Imposing a foreign PME levy is to level the playing field and rebalance living standard between the local and foreign PMEs .  Afterall, Singaporeans have made the above attractive listed factors for companies possible through:

1.  their 2-years NS service to ensure safe business environment

2.  contributed to taxes which is reinvested by the Singapore government in infrastructure 

3.  and paid good salaries to civil servants and government officials to ensure efficiency in business laws and regulations and keeping corporate tax low.

Should companies move away just because of foreign PME levy, then it is not worthwhile to hold them back in Singapore, as they are already free-riding on Singapore for all the other attractive factors listed above. 

If replacement of local with foreign PMEs continue, not only will local PMEs end up structurally unemployed, the foreign PMEs will also bring back their enhanced skillsets and experiencs back home, which will further strengthen their home countries' competitive edge over Singapore.

Quantitative Compensation Model

The quantitative compensation model depends on the performance scoring system as a basis for formulating a reward scheme for performance.

The detail of the components are as follows:
The NFV metric used is Economic Profit, EP (also known as Economic Value Added, EVA™ measure) with the adding back of any new investment, above normal staff training expenses and extra-ordinary promotional expenses for the year , considered the most appropriate financial measure as it takes into consideration both the organization’s employees and the investors’ interest into consideration. The definition is as follows:
EP = NOPAT – (WACC*Capital Employed)
Or EP = Invested Capital (ROIC – WACC)
where NOPAT stands for Net Operating Profit After Tax (before interest charges), WACC stands for Weighted Average Cost of Capital (all funding sources, including shareholders fund),

The Continuous Process Development metric, CPD is as follows:
CPD = a + b*Customers + c*Operations + d*Innovation + e*Manpower + f*Regulatory
where;
Customers processes (e.g. Customer relationship management, customer service turnover time)
Operations processes (e.g. supply chain, flexible production)
Innovation processes (e.g. Quality Function Deployment or also known House of Quality approach, concurrent prototyping and market testing)
Manpower management processes (e.g. internal 'selling' process of management objectives to staff, appropriate structure of staff performance review system)
Regulatory or Social Processes (e.g. lobby process, strategic public communication program) and
a, b, c, d, e and f are constants related to the specified indicators.

The choices of special projects for development, SPD are wide and diverse or at times, none for certain business years. Hence, it is necessary to dedicate a metric to monitor and reward its performance based on the pre-defined organization indicators for the projects.

To illustrate the application of metric, two possible projects for organization development are namely; mergers and acquisitions, M&A or market share goal.

The possible key indicators in market share metrics are:
a) The percentage market share attainment of each business units.
b) The level of customers’ awareness change of the organization or its products.
c) The level of ‘positiveness’ towards the organization or its products’ image
i. The success level of channel development
ii. Other criteria that are in congruent to market share goal

Given that each strategic process development project are different, the SPD metric will be defined as follows:
SPD = a + b*Indicator 1 + c*Indicator 2 + …...+ n*Indicator N
where each of the Indicator, 1 to n represent the respective key indicators that are chosen and its respective constants.

The Share Price Metric, SPM metric is defined as follows:
SPM = (MVAYearN+1 – MVA YearN) / MVA YearN
Where MVAYearN+1 is the MVA at the end of the year N and
MVAYearN is the MVA at the beginning of the year N.

The organization risk management, ORM metric of OP-Score model is as follows:
ORM = a + b*R + c*M + d*F + e*O + f*I + g*HR + h*E + i*P
where;
R is Reputational Risk
M is Market Risk
F is Financial Risk
O is Operations Risk
I is Innovation risk
HR is Human resource (or Manpower) and Administration risk
E is Economic risk
P is Political and Regulatory risk and,
a, b, c, d, e, f, g, h, and i are constants associated with the respective risk measures.

Building on the Performance Scoring System, the quantitative compensation model is as follows:

For further details to the rationale of these indicators and sub-indicators and the methodology of establishing the appropriate compensation system, it will be in the book that I will be publishing soon. For those who are interested in the book, please email me at artlim66@hotmail.com

Will we live to see the downfall of Capitalism?

In 1990s, the capitalist world watch the demise of the communist system, when Soviet Union broke up and the communist countries subsequently switched to capitalist system. China also begin the process of introducing capitalist system into its economy.

The failure of the communist system lies with its basic assumption or as Communism motto went 'from each his best, to each his needs'. Communism believes that the greedy 'invisible hand' of capitalism will ultimately leads to the downfall of capitalistic system in the end. To overcome personal greed and its destructive force, communism propose that a selected group of effective (and enlightened) leaders make centralised decisions on production and the distribution of the produces fairly, according to each individual's needs. Communism has failed to recognise the essence of the human motivations, that is, only out of selfish interest would man put in his best efforts and expects to be rewarded proportionately according to his contribution, and not based on his needs (propounded by Adam Smith). History proofs communism wrong on its assumption of central planning effectiveness.

Fast forwarding to 2008, we witness the possible collapse of the capitalism, almost like the way the father of Communism, Karl Marx had predicted. The self interest of Adam Smith's'invisible' hands of private enterprises (this time round, it is bankers that starts the ball rolling, thought other corporate CEOs and their fellow managers are part of the whole process) have brought chaos and destruction to the major capitalist countries financial system. The capitalists have overlook the fact that financial system is not a just a sector of the economy, but one of the main foundation of the capitalist system.

The 'invisible' hand of capitalism has gone terrribly wrong. Despite its success in seemingly getting maximum output from man, the manipulative nature of man will always game the economic system to his own personal advantage, even to the point of destroying the whole economic system at his own subsequent peril. Instead of achieving capitalism motto of "from each his best, to each his contribution", capitalists end up seeking to maximize his returns (but not his contributions) through gaming the capitalist system and not putting his best to economic production.

In short, while communism failed to recognise the human nature of maximum contribution can only come from maximum returns to each his own effort, the capitalism failed to recognise that without proper regulation and control, man will game the economic system to maximise his personal returns (even without truly maximising their own economic contribution) at the expense of the economic stability of the capitalism.

To-date, the capitalist countries still refuse to accept and correct the major inherent weaknesses of capitalism. It may be due to the fact that the rule makers still have the advantage of gaming the economic system to their own personal advantage, or they have yet to agree on what needs to be corrected. Paralysis of actions will cause further damage to the capitalism, and I hope the corrections are done before it is too late, which is now leading towards the collapse of the modern capitalist economy structure as we know them. Buying gold reflects to the progressive loss of confidence of capitalism, and indirectly, also the growing belief that barter trading is a safer bet.

Nevertheless, Capitalism has undergo many tests, and evolves succesfully despite its many hiccups. In the early period of industrialisation, the private enterprises, in its quest for profit, at times, pollute or contaminate the environment. Capitalist system later realise these 'negative' externalities. For some less damaging practices, costs were imposed and for others, there were total ban on certain activities. During the 1930s where capitalism wobbled in its excesses of financial leverage, regulations were then put in place to prevent future occurrences. Yet, many of these regulations were removed in the subsequent years as capitalists choose to believe that regulations are hindrances to capitalist efficiency, though some would attribute it to the basic human greed of allowing themselve to game the economic system once again.

The latest test to Capitalism lies with its conflict of interests practices that had seeps into the capitalist system. In addition, with the advance of information technology, it also give rise to complex and speedy transactions which made some of the regulations obsolete or weak in reining in human greed and their 'gaming' ability.

If these threats are not face head-on, we may live to witness the collapse of Capitalism which will give rise to very uncertain economic future of back to basics, barter trading system. Barter trading is definitely a weak and disabling form of economic activities.

The threats lies in the conflict of interests' practices;

1. When rating agencies are paid by the company whom they are rating, how accurate can their rating be?
2. When audit are paid by the person who they are auditing, how much truth can we expect from these auditors?
3. When the board of directors are recommended (or indirectly appointed) by the CEO, whose interests will they serve, except mainly the CEO?
4. When the independent directors are appointed by the CEO, how independent can they be, if they seek self interest (capitalist norm) of staying on board, and getting paid accordingly?
5. When the compensation committee, which is indirectly appointed by the CEO, makes their CEO package recommendation, what chance that they will recommend strict criteria of performance for compensation?
6. When risk is left to the bankers or financial institution's managers' personal discretion (managers, of which, most hardly their own banks' shares) to decide on their own, what is the likelihood of them rating risk as highest priority as compared to paying extranomical bonus to themselves by discounting risk to its minimum?

Prior to his death in 2008, the world's greatest management guru, Peter Drucker one last message to the world was the need of 'conscience' activities (or honest assessment of corporate performance are instituted) within each organisation, so as to enhance the stability of the company and in its wider contact, the stability of Capitalism.

To overcome the above threats requires a simple solution of setting up of national agencies for audit, rating, government appointed independent directors, and national financial risk assessment board which increase its level of independence. It may give rise to public servants' corruption though its is more managable than the current state of 'private' corruption. It will increase the costs or reduce the efficiency of economic activities, but not to socialise these costs would risk the ultimate economic systemic failure. As such, the costs justify itself.

Another solution would be the capitalistic approach or strong regulatory rules, similar to the legal class action framework. Rules of inpunitive punishment for gaming the system illegally are put in place, for example, if the audit firm failed to point out obvious violation of account bookings of the firm, the audit firm will incur unlimited liability exposure. But if it is a small audit firm, they are able to gain significantly and divert their rewards to their family members, then the excessive benefits gains will outweigh the subsequent costs of punishment. As such, it will not overcome the gaming of individual that can cause signficant damage to the system, as in the case of the Madoff's ponzi scheme, applicable to both the auditor firm as well as Madoff himself. Using complex legal terms and conditions, many products are sold frivolously to uninformed or unsuspecting victims who suffer hugh losses subsequently, triggering the loss of confidence in the capitalistic system.

In fact, the greatest threat to capitalist system is the capitalistic systemic failure where every man believes their greediness is justified, and their own little effort cannot make a difference to the systemic failure. As such, the bankers, the politicans, the trade unionists, the workers and even the cheaters (those who game outside the written economic rules) game the system, ensuring their own 'profit' while triggering the systemic collapse of Capitalism. Is Drucker's hope of man's own wisdom see us through this round, or will our generation lives to see the end of Capitalism?

Stable banking model--Singapore way

With the massive global credit crunch, UK seems to be moving towards nationalising their banks while US stubbornly clings on to their privately owned banks (though publicly listed). A few years ago, China ‘liberates’ her nationalised banks into the arms of the world’s private owners.

Just over the few years, we witness the wild changing fortunes of banks. Despite the heavy losses and in fact, bankrupt banks, the US remains convinced that the model of privately controlled banks will still be the most efficient in performing its roles of facilitating the economic activities of the country. US still believe Adam Smith’s “invisible hand’ of market forces works best in allocating resources, including the banking system. US is doubtful of government management of banks as political entanglements, lack of direct accountability and personal drives will compromise the bank’s effectiveness and performance.

Given the current credit crunch, UK may be forced to nationalised the banks so as to push out the loans to the businesses. Most businesses depend on certain level of liquidity (or credit support) for their working capital to function, otherwise, they will bucket under its own financial exposure. Privately owned, the bank’s managers and owners are very ‘afraid’ to extend loans to most businesses in current climate, given the high uncertainty of businesses viability across the board. When fear of business’ failures (and the extended loans) feeds on itself, it will create greater fear and even more likely to turn it into reality.

The twin devils of private and public management failure of banks seem to be a Catch-22 situation when the global economy traps itself into the corner by allowing the global banks to run amok with a total lack of accountability.

Beside the successful current MAS supervision and regulatory structure for the banks, Singapore used to have an specially created successful banking feature in the form of Development Bank of Singapore (and Post Office Saving Bank can be considered as a sister arm), fully owned by the government but operate like private entities. These two banks can be seen as one as it will still serve its purpose, that is, to provide a stable banking environment for the country’s growing economy. The government direct control of the bank allows it to guide the overall banking practices in the country through its presence and competition in the banking environment. With special emphasis for development, the bank had played an effective role of funding projects that at times, the privately owned banks avoided, especially, when the risk seems high on project basis though the returns may be even higher. The returns in the form of economic growth, stability and positive externalities that a country need, are sometimes can only be undertaken by such a bank. Such a bank will be able to offer supposedly ‘risky’ loans for great returns, and thus, pushes the privately owned banks to either catch up or be left behind.

In a way, a government owned bank (runs as a private company) will serve a function similar to the NTUC supermarket chain. It helps to stabilise the prices and practices in the period of uncertainty while still maintaining a viable banking business model. Given the great economic uncertainty, government may have to consider putting in place such a bank to serve Singapore, especially in such tumultuous time, as the global severe credit crunch tide will reach our shores soon. In fact, the major economies should also consider Singapore banking model in overcoming their current banking paralysis.

Economist's view of Sgp Y09 govt budget

In the face of a fast deteriorating US economy and rising unemployment, its effect is already felt in most other major economies, and similarly, Singapore economy is weakening. Singapore employment situation seems weirdly calm at 2.2% unemployment in Sep Y08, though it is expected rise as the months passes. A recent survey conducted by Business Times still indicate a projected Y09 average salary increase of 3.7% and bonus increase of 15.5% for Singapore labour market.

From an economist viewpoint, Singapore government has the following factors for consideration.

1. To minimize unemployment while bracing through the stormy global economy in Y09
2. To upkeep citizens’ affordability index so as to avoid a massive payment seizure of loans (personal housing, cars and other loans), and
3. To upkeep corporate viability to as to maintain the high labour employment and business continuity so as to avoid hurting the Singapore financial system
4. To continually upgrade Singapore competitiveness and to attract more companies to be set up in Singapore
5. To further diversify our economic activities into more markets and multiple sectors, while selecting niche sectors where Singapore can excel in
6. To be prudent in deploying the nation’s reserve, avoiding high risk bets while be bold enough to take advantage of opportunities that will yield strong positive long term results
7. To be watchful of social stability and affordability of the citizens during this difficult period that may last for several years.

In view of the humongous tasks ahead and at times, conflicting goals, the government decided to adopt proactive approach of introducing new fiscal policies and NWC review in Jan 09 instead of the normal budgetary policies period in Mar 09 and NWC review in July.

To achieve the above goals, Singapore government would probably consider the following for the businesses and related impacts.

1. Government to accumulate the finance from a relatively good Y08 through the normal tax revenue (that is, no tax benefits for Y08 earnings/income) so as to allow the government the flexibility and scope of fiscal injection in Y09.
2. To introduce attractive tax incentives for companies to continue their business and even expansion for Y2009, possible tax incentives may be announced; reduce corporate tax to 16% for fiscal year 2010 (or tax on Y09 profits) and to reduce personal income tax brackets further so as to support domestic consumption for Y09. After all, consumption will yield 7% GST revenue to the government. One possible corporate tax rebate policy that should be considered for Y09 may be to allow companies to claim double the new staff salary costs incurred and one and a half on existing staff costs, so as to minimize unemployment and to lower companies’ headcount cost. The government will continue to offer special tax rebates for certain high technology and service sectors which the government would want to encourage. In addition, further support for local entrepreneurship in a form of direct government loan may be put in place.
3. If their effort of making loans through the banks do not significantly improve, Government may revitalise or create new financial agencies to make loans directly companies as banks are still too tight-grip on their business lending even with governmental financing support.
4. At this stage, January Y09, it will be considered too early to cut the percentage of all CPF contribution, though there will be a review as to whether there is a need for a downward adjustment to the CPF contribution in July 09, should the economic worsen significantly. This is to allow home owners to financially prepare for possible change of CPF contributions ahead. Come, July Y09, if need to, the government may cut employers’ CPF contribution and in an even more severe economic condition, employees’ CPF contribution may also be cut. The cut/s depends on the degree of the economic severity.
5. Commercial property and land tax to be lowered, so that JTC and other big commercial property owners can pass on the savings to the companies operating in Singapore.
6. Some fiscal stimuli were announced recently, SPUR, infrastructure works to be brought forward,…etc but Singapore government are lining more projects as the year 2009 progress, to be ready to meet any serious downturn of the economy. One such project like Singapore-World Bank Urban Development training program, and also other like expanding the education sector, health-care sector, bio-medical sector and many other are already in the pipeline and many more to come if need to.
7. It is a bit too premature to stimulate the private housing sector in this January Y09 budget, as it is too early to assess the fallout of global property bubble and the aggressive US economic rescue package, though it may be considered at the later stage.

Though it may not be in the budget, but under separate forum under the MAS, a temporary weakening of the SGD would be helpful in reducing overall operating costs for existing and new companies setting up in Singapore.