Singapore is about to get more costly for businesses

[SINGAPORE] Businesses in Singapore are bracing for higher costs in a country that's already among the world's most expensive to live in.

From a 30 per cent increase in water prices to higher diesel costs to a looming carbon tax, manufacturers are being forced to adjust their operations to remain competitive in an economy that's only recently recovering from an export slump. It also signals a pick-up in inflation, an outcome the central bank flagged in its monetary policy statement last week.

Of the measures announced by Finance Minister Heng Swee Keat in his February budget, higher water tariffs have generated the most debate and anxiety among Singaporeans.

Having kept the cost steady since 2000, Prime Minister Lee Hsien Loong is clear why the government needs to adjust prices: as an island nation that's water-stressed, the state needs to pay for expensive desalination plants. Higher prices will also make consumers more aware of their usage of the scarce resource.

For Lee Soon Kiat, director of government relations at semiconductor maker Globalfoundries Inc., higher water tariffs - to be implemented in two phases beginning in July - means extra costs of as much as S$5 million a year at plants producing electrical circuits.

"It's clear that it will add to our operating costs," said Mr Lee, who is also a member of the executive committee of Singapore's Semiconductor Industry Association. "It's an issue that our industry will have to adapt to, and continue to pursue water saving or recycling measures in our processes."

COMPETITIVENESS INDEX

Singapore is routinely ranked among the top when it comes to global competitiveness, mainly because of its low company tax rates, good infrastructure and easy procedures to open a business, rather than cost effectiveness.

It was placed fourth out of 61 countries in last year's world competitiveness index - compiled by the Swiss business school IMD - but ranked among the lowest, at 57, on scores for cost of living.

Song Seng Wun, a regional economist at CIMB Private Bank in Singapore, said the government is banking on companies accepting higher costs in exchange for the city state's other advantages: its reliable power and water supply, business-friendly framework, stable legal and political system and competitive tax rates.

"Singapore has never been the cheapest place to do business," he said. "Other factors have to be strong enough to keep Singapore as a very competitive place." Measures to create a green and healthy environment is "also a competitive advantage," he said.

The moves fit into the government's broader goal of forcing businesses to innovate in order to boost productivity, from encouraging companies to adopt digital technologies to re-skilling workers to keep pace with global change.

TIGER BEER

At S$1.21 per cubic meter currently, water for industrial use in Singapore is already more expensive than in many other Asian countries, and several times pricier than in China, according to Simon Powell, head of Asian utilities research at UBS Group AG in Hong Kong.

That's forcing companies that rely on significant amounts of water, such as power plants and the brewery that produces the local Tiger beer, to review their consumption needs.

Tuas Power, one of the largest power generators in Singapore, had been implementing steps to save water before the cost announcement was made, said spokeswoman Michele Sit. The company will install additional meters to track unusually high consumption or wastage of water, she said.

Heineken NV's unit in Singapore, the maker of Tiger beer, had already committed to cut water usage by 20 per cent even before the planned tariff increase, according to its head of corporate affairs, Mitchell Leow. About 95 per cent of the beer is made out of water.

The company is working on a water reclamation project to process waste water for non-potable uses like general cleaning and for its brewery cooling towers, Mr Leow said.

Water consumption has been reduced by 4 per cent since 2010 through initiatives such as harvesting rainwater from rooftops, he said.

From the government's point of view, the pain of higher water prices is something businesses and consumers will have to bear as part of a broader goal of conserving the environment, said Euben Paracuelles, an economist at Nomura Holdings Inc in Singapore.

"The signal from the government is that they want to conserve an important resource, and that for them is a bigger consideration than others," Mr Paracuelles said.

BLOOMBERG