Disruption to Service industry

On the 1st September 2015, Eatsa, a high tech fast food restaurant opened near San Francisco’s Embarcadero. Eatsa revolutionaries the dining experience with full automation of all processes besides cooking and eating.

With the exception of a few kitchen staff, there is not a human in sight. The restaurant has received good reviews. This marks a new era – technology has begun disrupting the low skilled service industries. Technologies have always disrupted industries. And disruptions are not always friendly.

When personal computers became affordable, many processes were made more efficient. Less workers were required. The same happened within manufacturing over the last few decades. Today, the number of workers required in an automobile factory is a fraction of the number required 30 years ago.

But why is this development unsettling for Singapore and our region? Eatsa marks a tipping point because entrepreneurs have finally commercialized this automated solution. It no longer remains in the scientific repositories of institutes. Our service industries provide a lot of low skilled jobs that were harder for machines to replace.

Unlike the jobs of welders and technicians, it was harder to replace the work of waitresses. Within the next decade, this technology will become cheaper. Owners of F&B outlets can access this technology.

Low skilled Singaporeans must brace themselves for change. Policy makers cannot shield Singaporeans from these changes. It will be worse for Singapore or any country to regulate such technologies. In fact, it makes more sense to adapt to such changes quickly.

Rough economic seas call for leaders with proven track records

Rough economic seas call for leaders with proven track records [Alex Lew] 

Singapore has 5.5 million people, a tiny if not negligible domestic market. Other economies are significantly bigger: China has 1.36 billion people; Indonesia has 253 million.

Some argue that our purchasing power is higher. But it is mathematically impossible, in dollar terms, to consume as much as China or most of the rapidly growing nations in the region.

We will never be the natural top choice of operations for top firms, no matter how rich we become. 

Some of us think the Association of Southeast Asian Nations (ASEAN) will be Singaporeans’ hope. They believe ASEAN countries can form a common market as the European Union did. 

Unfortunately, ASEAN nations have very different characteristics and political interests.

While I believe ASEAN nations will be more cohesive with the ASEAN Economic Community 2015, Singapore will not be the Frankfurt equivalent in the EU. In fact, in the long run, it may be more palatable for each member to bypass ASEAN’s complex interests and deal with larger economies such as China and the United States individually.

This means Singapore has no alternative but to open our financial markets to the international community. We must also be the trading hub for this part of the world for as long as we are relevant.

Today, we are integrated with the world. Based on World Trade Organization data, our trade to gross domestic product ratio from 2011 to 2013 was 366.2. To put it simply, our economy will always be volatile and linked to global markets.

Notably, we were among the first to enter a recession in 2008 and among the first to enjoy great growth rates in later years.

Our interconnectedness requires us to select the smartest leaders of the lot to govern Singapore and help us survive on the rough economic seas. Many believe that the global economy will become more cyclical.

This implies that changes will happen quickly. In future, more Singaporeans will lose their jobs overnight. Industries may be wiped out by disruptive technologies. 

We need ministers with the uncompromising courage to identify and make policy changes. Singapore has no buffer against failure. If we were Malaysians, we could fail and return home from Kuala Lumpur. We would still own some land and go on with life. 

If Singapore fails, investors would exit; they are not beholden to Singaporeans. And we have no hinterland. Some argue that we should focus largely on supporting local firms, but we do not innovate as Israeli entrepreneurs do. 

Our local firms complain about the tighter quota on lower wage foreign workers, who have lower wage bills, but Singaporean employees want higher wages. These are tough questions. It is no wonder that almost 70 per cent of the electorate voted for the proven party with an economic track record.

Changi Airport needs to get its priorities right

In his commentary “Changi Airport must develop into a destination in itself” (Jan 6), Mr David Leo argues for the need to develop the airport as a “city” and retain its status as an aviation hub.

He proposes that it can be a place where people can visit for purposes other than transit. He rightly emphasises the need for it to remain competitive, with the rise of Dubai Airport as a preferred stop on the Kangaroo Route. But transforming Changi Airport into a standalone “city” should be the last of our priorities.

As a city state with many business and leisure options, Singapore is unique and different from competitors such as the United Arab Emirates.

Do travellers really prefer to stay around the airport when other city locations — Sentosa, Suntec Convention Centre, Singapore Expo, Fusionopolis, Raffles Convention Centre and Marina Bay Sands — are within a 30-minute taxi ride?

Anyway, they will have to clear immigration before they can access Project Jewel.

What should be enhanced instead is transport connectivity from the airport to downtown Singapore — for instance, a direct MRT route to the city, rather than the current inconvenient transfer at Tanah Merah station.

This leads to the next important issue: Transport planning. We must seriously consider the planning parameters in the east. Singapore’s priority has always been to ensure prudent, optimal utilisation of land and resources, which requires smarter planning of traffic infrastructure.

Airport users share the major roads leading to and from Changi Airport with residents in the east, who depend on those roads for their daily commute and may identify with the woes of traffic congestion there.

It is unwise to direct greater traffic, in the form of shoppers from the rest of Singapore, to Project Jewel in the coming years.

An airport’s real strength lies in connectivity and movement of goods and passengers. The greater freight volume we carry, the stronger our status as a transport and business hub.

We would also want more aerospace maintenance, repair and overhaul activities in the east. Major airlines should come to regard Singapore as the most efficient servicing centre in Asia.

Finally, the nation should focus on tapping future travel trends in the region and exert leverage as these evolve. For instance, how can Singapore capture greater returns from the increase in low-cost, short-haul flights around Asia?

This is what would secure Singapore’s position in the context of Asia’s growing economic importance.

article also appeared on todayonline

Transport issues are multifaceted and should be addressed at macro level

Transport Minister Lui Tuck Yew’s decision to leave politics has brought Singapore’s transport issues to the forefront again (“Transport Minister Lui to leave politics”; Aug 12).

MRT breakdowns, the unfortunate leitmotif during his tenure, had a direct and personal impact on Singaporeans, but the issue is multifaceted. We must address this suite of problems at a macro level.

First, Singapore is a large city, yet we are primarily dependent on one central transport system: The MRT. The bus system has been relatively peripheral since the MRT network was opened in the late 1980s.

Our transport planners prefer that buses be used predominantly as feeder services that connect Singaporeans from their homes to the nearest MRT station for their main commute to work.

The risk is clear: Since we cannot expect any mechanical system to have 100 per cent uptime, we have to expect breakdowns, unfortunately.

Second, Singapore is largely a hub-and-spoke city. This implies that we are connected to the extent that we can get from one “hub” to another, for example Tampines to Jurong.

Direct connectivity between the two hubs is limited unless one can afford private transport. Of course, policymakers have been discouraging car ownership over time through the Certificate of Entitlement scheme.

Third, most of our workplaces are concentrated in a few central areas, whereas the majority of Singaporeans live in the west, east or north. Only those living in Commonwealth, Tiong Bahru, Redhill, Alexandra and Queenstown have it easier.

This is perhaps the leading cause of Singapore’s transport woes. During peak hours, much of Singapore’s working population travel on our arterial roads and MRT lines.

No transport policy can alleviate these bottlenecks because it is not prudent to sustain excess capacity during non-peak hours. Off-peak initiatives can help solve some problems, but they are not a game changer.

We should take a lighter regulatory stance towards private buses and taxis in the short term. In the longer term, we must start building public housing in downtown areas again. We can also expand business areas gradually.

We have tried to create business areas far from the central area, such as Changi Business Park. But this is not how a city grows.

Land pricing and zoning difficulties notwithstanding, we cannot sacrifice Singapore’s future for the sake of policy coherence.

Article also appeared on Todayonline

Singapore’s innovation policy

While I believe there are occasions justifying government’s role in innovation policy, Singapore government’s intervention is not always as successful as their counterparts in the United States.

The US government rewards those who deliver results. But Singapore funds those who generically address societal challenges and often, well packaged promises.

In Singapore’s case, if we still want to believe in the effectiveness of research agencies like A*Star, we need to find a group of civil servants who are able to take risk and to be accountable for results and to be technology experts. As I understand, most civil servants in charge of innovation policies are neither technology experts nor risk takers.

Perhaps it is time for an alternative innovation policy.

[Alex Lew]

The case against large immigration flow

The case against large immigration flow

The economic effect of positive net immigration to Singapore is negative relative to older people working longer. When the population base remains stable and retirees extend working life, we have a higher GDP per capital.

If we continue to bring in more immigrations without an end, there will be more stresses on our infrastructure. Comparatively, except for healthcare infrastructure, old people demands lesser for road usage, transport services and natural resources.

Intuitively, it makes more sense to retrain our aged population and to encourage them to work longer than to expand our population without end. This is perhaps why Japan rather deal with an aging population than tolerant aggressive immigration.

(I understand the need for a critical mass of population. Perhaps 6.9m or 10m is the defined figure, but there must be an eventual limit to our planning parameters)

[Alex Lew]

Is CPF Cheap funding source for Singapore Government?

Is CPF Cheap funding source for Singapore Government?

The contest is Government can get cheap source of fund at below 2.5% in the open market given Singapore’s credit rating.

Authorities may say that they can borrow at below the existing 2.4 to 2.5% CPF rate. Some may agree with the Government given Singapore’s strong credit ratings.

This is especially in the case where Singapore borrows only 10% of 20% of GDP.

But what is unclear is if Government were to borrow 100% of our GDP (Our existing debt levels), the credit ratings of Singapore will quickly fall, leading to very high borrowing rates.

In fact, it is not new to commoners that Singapore and Japan enjoys reasonable credit rating because the national debt is internal. One would argue that local Japanese and Singaporeans will not exit Japan and Singapore respectively, immediately.Polices can also be put in place to guard the exit.

As such, it may be unfair for Government to claim that CPF is not providing a cheap source of funds.

Why does GIC borrow from CPF, really?

Why does GIC borrow from CPF, really?

In his article, “There is no reason for GIC and Temasek Holdings to borrow money from your CPF”, Mr Jeremy Chen upholds the government’s defence that it is not borrowing CPF monies as a cheap source of funds.

He misses the point that if the government were to borrow from the market on a large scale, Singapore’s credit rating would no longer be triple-A.

We can agree with the government’s defence if it were to borrow, say, 10% or 20% of GDP from the market. But if the government were to borrow up from the market up to 100% of our GDP, the credit ratings of Singapore will quickly fall. In turn, this affects how much the government can borrow further.

For the record, Singapore recorded an overall government debt of 105.5% of GDP in 2013.

It is not news that Singapore and Japan enjoy reasonable credit ratings because the national debt of these countries is internal. The rationale behind such a credit rating is that Singaporean and Japanese citizens are unlikely exit their countries en masse suddenly, like in the case of a bank run.

The debates over CPF should rightly be focused on questioning the need for a compulsory annuity scheme for all account holders (see also our article for instance). But Singaporeans are right to also question the flows in the monetary system, not least when it affects their own money in their CPF accounts.

What we really need to fix about the CPF

What we really need to fix about the CPF

Giving CPF account holders the free choice to decide what to do with their own retirement savings is the key.

In the midst of all the recent debates on the Central Provident Fund (CPF), and the government’s moves of raising the CPF minimum sum and enforcing a compulsory annuity scheme on all account holders, we must go back to the fundamental principle behind the CPF — that it is a compulsory savings plan for retirement.

The key issue, therefore, is that we must allow CPF account holders the free choice to decide whether to withdraw everything at 55, or opt into an annuity scheme, or opt for something in between.

If CPF account holders think they can benefit from the annuity if they live long well beyond 80 years of age, let them do so. If they want to withdraw their retirement savings in toto to invest in a private scheme that provides for a higher yield of annuities, let them do so.

CPF account holders do not withdraw their savings just for reasons of pleasure and holidays, although it is perfectly their right to do so. Health care costs, for themselves, for family members, for rare diseases, for their children’s further education — these are the things Singaporeans need to spend on in this non-welfare state system.

Compulsory annuity scheme for CPF: where is the justification?

So why is there a need for a compulsory annuity scheme for CPF? Where is the statistical substantiation that a mandatory annuity is needed across the board — is there a substantial enough proportion of the population that has such a dire lack of savings that warrants this? Is there such a substantial proportion of the population that is proven to be absolutely incapable of planning their retirement financially?

We have not seen any such analysis or evidencing that typically accompanies government policymaking. Without this information, it is understandable why Singaporeans simply cannot accept the latest changes to the CPF.

Since the government has said that it is helping Singaporeans plan for retirement, then we would need to know — how were the projections for the minimum sum and the monthly annuity worked out? We don’t believe it is out in the public domain.

This brings us to the issue of income replacement rate (IRR) — what percentage of a worker’s income should we replace when he or she retires? Note that the higher the IRR, the greater the present burden on the worker who is at the threshold of retirement. The 2012 Chia and Tsui study on the IRR,[1] typically cited by the government, reported that the median male earner will be able to replace 70% of his wages when he retires, and female workers 64%. But these are the result of their academic study — it is not the government’s planning target, of which we have not been informed.

This makes the compulsory annuity scheme like a straitjacket for a madman — you are forced wear it to restrain yourself, so that you would not hurt yourself and those around you, we are told. But what if you are not a madman in the first place? What if you’ve been wrongfully diagnosed as a madman?

Management of the CPF funds

Then there are the issues about how the government should manage the CPF funds.

Our sovereign wealth funds should raise capital from international capital markets.

The default linkage of CPF funds to the sovereign wealth funds should be severed. This would give us the chance to rethink and restructure our retirement funding mechanisms.

The government has tried to defend the contention that CPF money a cheap source of funds for the sovereign wealth funds.[2] And we are told that government bonds still the most secure, with its AAA rating.

We can agree with this statement if the government were to borrow 10% or 20% of GDP. But note that if the government were to borrow up to 100% of our GDP, the credit ratings of Singapore will quickly fall, leading to very high borrowing rates.

In fact, it is not news that Singapore and Japan enjoy reasonable credit ratings because the national debt of these countries is internal. The rationale behind the credit ratings is that Singaporeans and the Japanese will not exit their countries en masse suddenly, like in the case of a bank run.

As such, we believe it is unfair for the government to claim that CPF is not providing a cheap source of funds.

Changes to CPF must pass through Parliament from now on

In conclusion, it is paramount that CPF account holders must have the choice and flexibility what is to be done with their retirement savings. They should have choice on whether to have their funds invested in the sovereign wealth funds or other instruments such as an equity index, a fixed income scheme, in funds or other such instruments. This would give Singaporeans the freedom of choice over the interest rates they wish to see from their savings, corresponding to their risk appetite.

And if they wish to withdraw all the CPF savings, whether to foot an urgent medical bill for treatment of a rare disease, for their children’s education, or for the holiday they have also dreamt about, they must be allowed to do so.

Finally, all changes to CPF policy must be presented to and passed by Parliament, and not be made a matter for subsidiary legislation. The political climate in Singapore on the CPF issue has reached such a point that the government ignores the voices of the people at its peril.

Can Singapore survive the knowledge and education revolution?

Can Singapore survive the knowledge and education revolution?

Higher education is no longer the privilege of the few. Middle class can now access higher education. The number of graduates is growing exponentially. With the introduction of quality Massive Open Online Courses, students from around the world have access to quality education.

Example
Udacity, has teamed up with AT&T and Georgia Tech to offer an online master’s degree in computing, at less than a third of the cost of the traditional version. Harvard Business School will soon offer an online “pre-MBA” for $1,500. Starbucks has offered to help pay for its staff to take online degrees with Arizona State University.

Unopar University offers low-cost degree courses using online materials and weekly seminars, transmitted via satellite. In America, Minerva University has lower fees (around $10,000 a year, instead of up to $60,000). The first batch of 20 students has just been accepted for Minerva’s foundation year in San Francisco, and will spend the rest of their course doing online tutorials while living outside America, with an emphasis on spending time in emerging economies as a selling-point to future employers.

Singapore at risk
Singaporeans are at risk if the global MOOCs provider offer common standards for accreditation. Should common accreditations be accepted globally, Singaporeans will be competing with a huge pool of readily available talent from emerging markets.

Online learning will take the world by storm. The financial and technological disruption will render many universities useless. The cost to train a Singaporean costing $100,000 per student over 4 years will no longer be competitive if MOOCs can train the same quality student for a fraction of the price.

Trend of automation
Carl Benedikt Frey and Michael Osborne, of Oxford University, suggested 47% of occupations could be automated in the next few decades. White collar jobs are not safe from elimination. What can the Singapore government do by then?

Cheap online education will eventually replace faculty. Star professors will outshine their peers. The gap between the best faculty members and the average will widen. Starlets will deliver key lectures. Their online seminars can be distributed to an unlimited number of students. The learning can be automated and the Q/A guided by a cheap graduate student.

I believe the quality of education will sustain and may even increase as students can now hear from the best professors. The question is how will Singapore respond in a global environment filled with cheap talents?

Annuities and Retirement Planning — Longevity Risk

A closer look at annuities and retirement planning in the context of Singapore

Annuities get very little respect because they are portrayed as expensive and loaded with sales fees. However, a rapidly aging demographic and declining real wages has jeopardised the current projections for government led pension plans. It is not easy to supplement retirement with private wealth management plans because the state cannot mandate how much citizens save beyond the scope of pension policy.

Life annuities are crucial because they hedge against longevity risks and medical expense risk. In fact, annuity payments should be inflation indexed. Life annuities have monthly payouts. The stream of cash flows can be replicated by a mix of bond payments. It does seem like bond yields may no longer be able to match up with the required annuity yield. To meet the annuity payouts over a longer time, annuity managers may need to introduce risky products like equity index funds into the portfolio. But it is unclear if citizens are open to endure the high risk.

In Singapore’s context, I am less sure if Singaporeans are preparing for longevity risks. Should they expect to systematically live longer, to say, 90 year old, the consumption save must reduce tremendously. Practically, a young professional who expects to live till 100 will need to start investing in equities as soon as he starts work.

It is incorrect to think that life annuities are expensive products if we assume Singapore is a competitive market for annuities. In a competitive market, we can assume that longevity risks and recent demographic trends are priced into these financial products.

There are ways to reduce premiums for annuities. The larger the insured pool, the lower the premiums. For one, the fixed costs will be reduced. The pooled risks approach a normal probability curve. This implies that Singapore government’s mandatory annuity policy is in the right direction from a policy point of view. But the policy makers should introduce the annuity programme with a softer approach. Perhaps annuities need not be made mandatory right at the start. In fact, the government can communicate the benefits of annuities and highlight the financial risks of not subscribing to an annuity.