Budget 'helps construction sector, but challenges remain'

Singapore

THE parts of Budget 2015 relevant to the construction sector bode well for it in the long term, as they herald a continued focus on infrastructure development and a raising of skills sets, say industry observers and players.

They add, however, that the going will still be rough, particularly for companies still hoping to regain a footing from the impact of the national drive to restructure the economy.

The commentators were reacting to the government's continued plan to promote higher-level job skills by simultaneously increasing the levy for basic skilled (or R2) workers, and reducing the man-year entitlement waiver levy for higher-skilled (R1) workers.

Chai Wai Fook, tax partner at EY, said: "Companies do recognise that there is no choice. The government is not changing direction. Either you innovate and improve productivity or you may be phased out."

He said the changes will have a limited impact on the bigger companies; with the muscle to pay higher salaries to local workers, these companies become eligible to hire more foreign ones. Smaller firms may not be able to do this. "In the long term, some smaller companies might drop out, simply because they can't compete, or they may be acquired, or they may acquire competitors so they can amalgamate resources and compete for government projects," he said.

Tan Tay Lek, corporate tax partner, at PwC Singapore, said smaller firms have to carve out niche areas or innovate in their product offerings and processes to survive.

"They will do well to consider the various budget initiatives targeted at small and medium-sized enterprises (SMEs), which are intended to help in growing their businesses," he said.

But Chiu Wu Hong, head of enterprise incentive advisory at KPMG Singapore, said that even if smaller companies are aware of the government schemes available, they may lack the resources to take advantage of them, because they may not have enough support staff to plan for worker training and upgrading.

Marc Sim, business development manager at Sterling Engineering, said the cash flow of such companies may take a hit while they wait to get their workers trained; in the interim - whether because of a lack of training slots or because the workers are not passing the formal examinations - employers have to continue paying the higher levies for their R2 workers.

Sterling Engineering, where 21 of the 24 workers have been classified as "higher skilled", does not have this problem, he said: "We are a sub-contractor and we offer a single trade. For us, it is easy to send our workers for upgrading because we are very focused and specialised. For main contractors, they have a harder time because theirs are general workers."

Most market watchers agree that the deferral of the planned increase in the foreign worker levy and the lowering of the levy for R1 workers will give the industry a reprieve.

PwC's Mr Tan warned that while these were welcome changes, it is unlikely that the industry will be celebrating just yet: "Labour is but one of the major component of a company's costs, and, given the recent fall in oil prices, which should lead to lower costs, the sector may have some ability to absorb the planned levy increases in the short term.

"Nevertheless, given the subdued outlook for the industry for the next few years, industry players would look forward to more incentives from the government next year to help them meet the challenges of higher labour costs amid a tough business environment." He cited training subsidies and assistance with worker retention and the adoption of new technologies as examples of incentives.

On a more positive note, the government's plans to develop infrastructure - Changi Airport's Terminal 5, the Tuas seaport and improvements to public transport - ensure a pipeline of work for construction companies, especially those with a track record in public projects.

KPMG's Mr Chiu had one caveat to offer: "Though there are encouraging signs of new infrastructure projects for the coming years in the mid- and long-term, some firms may wonder how many are available in Singapore in the short term, which will influence their forward planning."

Investment in infrastructure development will grow to S$30 billion by the end of this decade, 50 per cent higher than the S$20 billion to be spent in the coming fiscal year. The country's development expenditure was S$12 billion five years ago.

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