Productivity challenge stumps Singapore builders

Productivity challenge stumps builders

Monday, Mar 03, 2014

Cheryl Ong

The Straits Times

SINGAPORE – Builders are used to meeting complex challenges – just look at the Marina Bay Sands or any MRT station – but lifting productivity in the construction sector seems to stump them at every turn.

It is not for want of trying, however, or due to a lack of incentives – whether carrot or stick – from the Government.

Deeper issues that have made productivity gains hard to achieve remain, said industry players.

Bosses cite the extra costs of implementing new building methods, the advantages giant overseas construction firms have when it comes to tackling big jobs and the never-ending struggle to get skilled staff, whether foreign or local. They also want more time to adjust to the economy’s restructuring push.

An extra push came in last week’s Budget, with requirements for more efficient building designs and construction methods as well as the use of prefabricated components in state land tenders.

Foreign-worker policies were further tweaked to help firms retain valuable higher skilled workers or upgrade lower skilled staff.

“This is good because it’s a pity that when workers are trained till they are skilled enough, they have to leave. It’s tough for the firm because we have to start retraining new ones after that,” said Mr Eric Ng, executive director of Logistics Holdings, a main contractor for public projects.

Higher constructability scores – building standards that measure how far labour-efficient building methods are adopted – also mean that firms will be forced to look at more advanced technologies to speed up the construction process, Mr Ng said.

However, the Government also pressed on with its campaign to tighten foreign-worker inflows.

Monthly levies for lower skilled workers – now $450 and already due to hit $600 from July 1, 2015 – will rise to $700 on July 1, 2016.

This comes on top of additional measures introduced in past Budgets, such as imposing cuts to the number of foreign workers allowed for a project. But the many levy increases have not delivered a better report card with labour productivity falling 2.9 per cent last year, down from a 0.1 per cent gain recorded in 2012.

Structural problems

Much of the sector’s staffing problems stem from the Singaporean aversion to construction work. With locals reluctant to get their hands dirty and construction costs rising, firms turned to cheap foreign labour, particularly when the industry began to boom in the 1980s, said Singapore Business Federation chief executive Ho Meng Kit.

That was also when tunnelling work for the Circle and North East MRT lines began and construction of the Westin Stamford Hotel got under way.

The number of foreign workers shot up again when key projects like Marina Bay Sands and Resorts World Sentosa were started in 2007, said CIMB regional economist Song Seng Wun.

There were $24.5 billion worth of building contracts awarded that year, up 46.6 per cent on 2006. This soared by a further 45.6 per cent to $35.7 billion in 2008. Employment numbers went through the roof as well: from 254,600 in 2006 to 294,900 in 2007 and a spike to 360,200 in 2008. There are now 469,500 employed in the sector.

The construction sector also contributed $15.2 billion to last year’s gross domestic product of $370 billion, accounting for 4.1 per cent of the economy.

“The construction sector’s heavy dependence on manpower causes it to lag behind,” said Dr Randolph Tan, associate professor at SIM University’s Centre for Applied Research.

Mr Song added: “All these years, they’ve just been so used to having so many foreign workers on call until now. So this is where the adjustment becomes far more abrupt.”

Putting in more capital

Although firms have been pushed to mechanise and train higher skilled workers, the sector’s low margins remain a barrier to investment in innovation.

“Contractors don’t have this budget to pay (for innovation),” said construction director Jeffrey Teo of Lian Beng Construction.

“Even then you must have the project to invest for; I can’t just buy (machines) and stock up.”

And unlike manufacturing, construction is not based on straightforward replication, said Dr Tan, adding: “So any technology may not be easily re-used.”

That the big contracts for MRT lines are awarded to large foreign players gives local firms even less incentive to invest. “If you innovate but can’t get jobs, it would take a long time to recover your costs,” noted Mr Daniel Or, executive director of OKP Holdings.

Mr Ng of Logistics Holdings said: “In a way, we’re not given a chance to show what we’re capable of, and so why should I spend so much to invest in high-tech equipment.”

Some firms also noted that local players just do not have the financial prowess to undertake the projects won by foreign competitors.

The industry is also young given Singapore’s development only started in the 1960s, said Mr Or, and it was only in the past 10 to 15 years that more complex projects came on the scene.

“Foreign players… usually have an advantage because they have built up to a larger size beginning with their own countries,” added Dr Tan. “Their larger size enables them to exploit the significant economies of scale that a large-scale project entails. This is something smaller local economies cannot do.”

What next?

But Mr Teo Han Jo, partner (building sector) at KPMG Singapore, said local companies may find it challenging to renew themselves as young Singaporeans are hesitant to get their hands dirty.

It is common, for example, to hear of aspiring civil or industrial engineers becoming financial engineers instead, thanks to the prospect of fatter pay cheques, said Mr Song. In contrast, apprenticeships in countries like Australia develop the expertise of young talent early, said developer Lend Lease.

“With these qualified and experienced tradesmen, fewer workers are required on sites. We are currently exploring opportunities to introduce similar programmes in our Asian business,” said Mr Stuart Mendel, managing director of project management and construction, Lend Lease Asia.

It is a similar situation in Hong Kong, where foreign workers are barred from the construction industry.

It takes four to six days to complete one storey in a typical high-rise building in Hong Kong, but eight to 12 days in Singapore.

The key difference is that local construction workers in Hong Kong are paid four times more than foreign workers, estimated Dr Ho Nyok Yong, president of the Singapore Contractors Association, although he added that foreign workers here do not have to pay for their accommodation.

Family-owned firms that rely heavily on the next generation to keep running suffer and are the slowest to innovate as a result as their founders could well be ready for retirement, said Lian Beng’s Mr Teo. “They need a lot of encouragement to adopt new technologies, they don’t have the good staff to be innovative that way.”

To stay in the business, firms are likely to consolidate to keep up with the Government’s productivity campaign, especially if standards are set higher, said Mr Kevin Scully, executive chairman of finance house NRA Capital, who has analysed construction firms for over 30 years. “They have to team up with joint venture partners, then they’ll be able to import the technology and keep on being relevant.”

While the industry seems far off from Singapore’s target of increasing labour productivity by an average of 2 per cent to 3 per cent each year until 2020, more time – not just levies – is still needed to change the industry’s mindset.

“Fixing the problem is not impossible, but it will probably take a combination of time, mindset changes and ‘tough love’,” said Ms Selena Ling, head of treasury research and strategy at OCBC Bank.

But the consolation is that there is still an abundance of building contracts to be won – $31 billion to $38 billion this year, according to the Building and Construction Authority’s forecast.

“Inevitably adjustments mean that some will fail, but as long as the economy creates enough opportunity for growth, that’s the plus,” said Mr Song. “It depends on how you take advantage of it.”

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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