HEAD M - MINISTRY OF FINANCE

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Head M - Ministry of Finance

The Chairman: Head M - Ministry of Finance. Dr Ahmad Magad.

Islamic Banking

Dr Ahmad Mohd Magad: Sir, I beg to move,

That the total sum to be allocated for Head M of the Estimates be reduced by $100.

Over the last several years, Islamic banking and finance is rapidly emerging as an alternative to conventional banking and finance. Its applicability is not just confined to Muslim countries. In the UK, the Financial Services Authority has recently given the go-ahead for the launch of the first totally Islamic British bank providing banking facilities to Britain's 1.8 million Muslims, in accordance with Islamic Syariah principles. In Malaysia, a significant number of non-Muslim customers access Islamic banking products and services.

In the light of its increasing popularity, I would like to propose that the Ministry of Finance and MAS consider the development of a full-fledged Islamic banking and financial system alongside our established conventional banking system in three phases:

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First phase, Sir, to enable Islamic banking to operate and function smoothly, it requires the support of Islamic financial markets and a critical mass of players. The financial market is required to provide a broad variety of instruments and an inter-bank market that, in turn, will provide the matching mechanism between the deficit and surplus units in the Islamic banking system.

Typically, the Islamic money market comprises the trading of Islamic papers, the Mudharabah (or profit sharing) inter-bank investment and the Islamic clearing and settlement system. One approach is for the MAS, in collaboration with the Singapore Muslim Religious Council, or MUIS, to create this market by issuing Government Treasury Bills based on Islamic principles.

On the Islamic capital market front, more local and foreign companies could be encouraged to issue Islamic corporate securities out of Singapore. To support the Islamic equity market, Singapore's conventional stockbroking firms could be encouraged to offer Islamic stock-broking services and develop an Islamic index for listing of Syariah-approved counters.

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Sir, Phase 2 is the development of Islamic banking window. Islamic banking industry needs some renowned financial institutions to make it viable and operational. Towards this end, MAS could consider inviting reputable full-fledged Islamic banks from the Middle East and neighbouring countries to set up their banking operations in Singapore, in addition to encouraging existing financial institutions to offer banking services through an Islamic banking window using their existing infrastructure and branches.

Sir, Phase 3 is the development of an Islamic banking infrastructure. To provide

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adequate infrastructure for the development of a robust Islamic banking system, Singapore needs to consider the introduction of an Islamic Banking Act in the long run, to govern the operations of Islamic banks and financial institutions. Models already in existence in the UK and Malaysia could be used as a basis for us to develop our own Act.

However, I believe Islamic banks could still operate within the existing Banking Act, as it has several provisions that empower the Minister for Finance to respond to the changing financial landscape. The Minister, under the existing Act, could grant approval and exemption to banks that wish to introduce unconventional banking products and services to the public. The granting of approval to OCBC to operate an Islamic banking window several years ago is a case in point. I would like to therefore propose that the MAS continue to exercise and extend flexibility in granting special exemptions in approving innovative Islamic banking products and services. Over time, as the Islamic banking industry develops the critical mass of players and customers, and as the banking environment becomes more complex, the MAS could consider the formulation of our own Islamic Banking Act.

Creation of a central Syariah board. As Islamic Banking is governed by Islamic Law, the role of MUIS is critical. I would like to propose that MUIS establish a National Syariah Advisory Council that will be empowered as the sole authority to issue opinions and decisions in Islamic Banking and Finance. Although the Islamic Bank and the non-interest bearing banks may also appoint their Syariah advisers to advise them on day-to-day operations, they should be required to refer to MUIS through MAS on policy-related Syariah issues. This Council can also advise MAS on Syariah issues pertaining to Islamic banking.

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Fund Management

Mr Arthur Fong (West Coast): Mr Chairman, in Singapore's push towards establishing ourselves as a pre-eminent financial centre, I am happy to note that we have been making good progress.

I need to declare that I am employed in the private banking industry, and although my cut is on fund management, I must state that, in the course of my work, I do employ the services and products of fund managers.

Mr Chairman, investing in funds requires some knowledge in different areas of risks, like volatility, concentration risks, sector-specific or industry-specific risks and sovereign risks that the funds are invested in. In building up the fund management industry in Singapore, fund managers will naturally have among its first clients not just individuals but local corporations and institutions.

Many in the fund management industry have fed back that, too often, local institutions are too focused in the fees and expense ratios. It is not that these are not important. As a matter of fact, they are very important. But the tilt should be towards understanding how the performances are derived, eg, in the kind of investment modes and strategies that the fund managers employ. I understand that the Wealth Management Institute has begun its classes and is receiving much positive response in so far as its role is concerned, that is, to provide industry professionals and want-to-be private bankers value-added training and competence. Can the WMI perhaps also consider educating institutions and local corporations, specifically in evaluating and assessing funds to be managed by fund managers?

The Chairman: Your time is up, Mr Fong.

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Financing for SMEs

Dr Ahmad Mohd Magad: Sir, owing to excessive prudence by our local banks, which do not number too many, to lend to our SMEs, I would like the MOF to consider being more liberal in terms of opening up the banking sector to allow foreign banks to provide financing for SMEs. This will spur more competition among banks and, therefore, enable the SMEs to benefit from lower borrowing rates and more efficient banking services. Local banks have provided excellent services to our SME community for many years. However, with the consolidation and merger exercise these banks underwent in the late 1990s, our SMEs are finding it harder to obtain financing due to a limited number of banks they can go to.

I believe foreign banks can step in to fill this void. However, it is my understanding that foreign banks are restricted in their product offerings, even if they have a full-fledged service licence to operate here. Many are eager to expand their local operations and want to extend a wider range of services to the business community here. I am confident that they will bring with them more innovative products and services that will ultimately benefit more businesses. Foreign banks could also help SMEs expand into overseas markets where they already have an established presence.

Fund Raising

Mr Inderjit Singh (Ang Mo Kio): Sir, in every discussion I have with entrepreneurs, small businesses and industry associations, the question of access to financing always comes out without fail. As I mentioned during my Budget speech, I am happy with the progress that we have made in the last two years or so, and we have seen many new financing instruments available for businesses and

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for entrepreneurs to apply. I would like to thank the Government for the support that it has given for these initiatives that we have tried to put in place. I hope that we will not lose momentum, as I said, and I look forward to the same type of support and enthusiasm from the Government as we continue our work.

But of particular concern lately has been the difficulty faced by companies that are in the rapid growth phase of their life cycle. The main source of financing for them still remains the debt type of financing. They are, therefore, limited in their growth because of the availability of financing that is available to them, and I would like to suggest three areas.

Debt financing. First of all, the same subject that Dr Ahmad Magad brought up. Let us be more liberal about our banking licensing. While we want big banks, we can also have small banks in Singapore. In that respect, I think we have some finance companies that could transform themselves into banks, and I hope that the Minister will look into this.

Sir, second is the emergence of mezzanine funds that I think is lacking in Singapore. This is quite common in many markets around the world, particularly in places like the US, Europe and Taiwan. Just as we spurred the emergence of a venture capital market with incentives and by providing Government funds, I suggest that we do the same for mezzanine-type funds. There is a very good example that we can follow and we do not really have to reinvent the wheel here, and this is called the Small Business Investment Company (SBIC) programme that is administered by the Small Business Administration (SBA). This SBA is actually a government statutory board in the US that looks after small businesses. With their own capital and funds borrowed at very favourable rates from the federal

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government, SBICs are able to provide venture capital, either in the form of debt or equity, to small independent businesses, both new companies as well as established companies that are in the growth phase. The Government provides leverage of up to three times, which means that, for every dollar that the SBIC provides, the Government provides $3 of funding. I think it is about time that we looked into this area in addition to VC financing.

Sir, finally, the area of equity financing. Lately, we have seen a few cases of Singapore companies that have failed to get approval to list on the Singapore Stock Exchange. But these same companies get approval to list in other reputable exchanges, like NASDAQ in USA, ASX in Australia, and the Hong Kong Stock Exchange. I suspect that MAS has certain restrictions on SGX that cause this to happen. I hope that the Government will look into refining the requirements so that these companies can tap the local stock exchange instead of going to other exchanges. At the same time, I am encouraged that the OTC is about to be formed because of legislative changes. I hope that we will not lose momentum on this.

The Chairman: Miss Penny Low. You have two cuts. Take them together. Total of three minutes.

Financial Services

Miss Penny Low: Sir, allow me to raise two issues.

First, cash-back schemes. There are many cash-back schemes in the market for big ticket non-cash upfront purchases, eg, HDB, single-premium ILPs purchased under CPF, renovation loans, car purchases, and even hire purchases, have short-term-gain-long-term-pain type of cash-back schemes. The question is: other than the HDB scheme, has anything

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been done to curb the cash-back transactions? Obviously, MAS does not seem to be able to catch up with the variety. Does that signal a need to relook at the various laws governing loans and hire purchases? Are there any regulations that prohibit the middlemen, like financial advisers or car dealers, agents, etc, from engaging in such deals? What about the rebates that are currently allowed?

Second, ILPs. There is a need for transparency and fair practice. Some companies tax clients twice by converting cash premiums, first into unit trusts, before converting them back to pay for administrative and mortality charges. Clients effectively pay an extra 5%, which is the bid offer spread of the charges. This is unfair practice. On the mortality schedules, would MAS also help to ensure that the mortality tables that are used under insurance are reviewed and updated in accordance with the changes in the life expectancy of Singaporeans.

MoneySense Programme

Let me move on to my next cut, which is on the MoneySense programme.

Sir, I observe that many of the MoneySense programmes are run by financial service industry operators associated with vested interests. As a result, some of them focus more on the investment tools rather than on cultivating good habits and values in people. Part of the reason is in its 50% deficit funding principle. I am especially concerned that the elderly, less educated and lower-income group who are more difficult to reach out to may not benefit from existing programmes. One way to overcome this is through the help of organisations with similar clientele. Will MoneySense programme consider building capacity within these existing organisations, which could be VWOs, social enterprises, NGOs, and even grassroots organisations, to

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reach out to these specific groups? VWOs have fed back to me that one-off programmes have limited impact, but follow-up sessions with clients over a sustained period of time can effectively build good habits. Would MoneySense consider fully funding such programmes, which could run over a longer term and at a higher cost than a one-off programme? In addition, what are MoneySense's funding principles, and how has it changed over the last one year or so?

The Minister for Education (Mr Tharman Shanmugaratnam): Mr Chairman, on behalf of the Senior Minister. I will take first the questions raised by Dr Ahmad Magad and Mr Inderjit Singh on financing issues, particularly for SMEs, and whether we should see a larger role for specialised SME banks and finance companies.

Our approach to SME financing is basically to allow for a competitive market. Each of the local banks is, in fact, quite active in the SME market. I understand that about a quarter or so of their corporate loans portfolio is really in the SME segment of the market. The foreign banks are free to offer financing to SME customers. There are no restrictions on the types of customers that foreign banks with a qualified full bank licence or wholesale banking licence can offer and deal with. In fact, even our offshore banks are free to deal in Singapore dollar loans up to quite a generous cap. So, it is quite a competitive market, if you put together the local banks and the foreign banks. A few foreign banks in fact specialise in SME lending. We also have credit and leasing companies which are not regulated by MAS but they are active in the financing market.

MAS welcomes initiatives by banks to provide new financing options for the SMEs. In fact, we have seen some recent initiatives to help SMEs tap the capital markets, which is I think a very

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interesting initiative, because it allows SMEs who would not on their own be able to tap the capital market. By pooling risks together with a diversified pool of other SMEs, they are able to enter the market. SPRING Singapore has been working on this, and it is launching a scheme this year. It has selected DBS to

manage a $300 million SME loan securitisation programme. That's an example of an initiative that is bringing in more capital to SMEs and to the market than would normally be possible through banking channels.

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I agree with Dr Magad that there is a role for more specialist players in the SME financing market. MAS is open to admitting banks with specialist expertise and SME financing so long as they are financially sound and meet our prudential requirements. Some players in foreign markets who specialise in SME financing do not rely on deposits as a source of funds. Typically, they rely on the capital markets to fund themselves. And in such instances, they will not require a banking licence from the MAS. There are a few such players in Singapore already who are funded primarily by issuing debt and some equity. They are active in equipment leasing, factoring and working capital loan business to SMEs.

Mr Inderjit Singh has asked whether we should issue bank licences to finance companies. I would first say that our local banks and foreign banks will be the mainstay of corporate financing in Singapore, including for the SME market. All over the world, we find that scale is important. Banks are getting larger all over the world because scale brings efficiency, synergies, better management capabilities and better risk management. Banks are getting larger and for reasons that are driven by the market, not regulators.

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But I agree that there is a role for smaller, specialised lenders in the domestic market. The finance companies are playing a useful role in servicing smaller corporate customers and retail customers. They do not have regional ambitions, but they complement the role played by our local and foreign banks. MAS has, in recent years, allowed the better-managed and financially stronger finance companies greater flexibility in servicing their SME customers, such as in unsecured lending and corporate finance advisory services. We are prepared to allow selected finance companies to further expand their scope of services on condition that they have adequate expertise, internal controls and risk management procedures.

Mr Inderjit Singh also raised the issue of listings on the SGX and whether SGX's criteria are too stringent. As Mr Inderjit Singh is aware, SGX revised its listing rules in September 1999 to allow a wider spectrum of companies, with different financial and operating characteristics, to list on the main board. Previously, it used to be three years of a solid profit record. The revised criteria allow companies with a shorter track record of profit to be listed. We also allow companies without a profit record, but with significant market capitalisation, $80 million or above, to be listed on the main board. The main board's criteria are a little less stringent than most foreign exchanges when it comes to the market capitalisation requirements, a little more stringent when it comes to the profitability criterion - more stringent, for instance, than Nasdaq.

But Sesdaq exists, and Sesdaq was set up for this purpose of providing an alternative channel for companies without a profit record, or even without a track record, to raise capital. What the applicants need to do is to demonstrate that they are engaged in a business that is expected to be viable and profitable, with prospects for future growth and

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expansion. Sesdaq is the growth market. And it has not done too badly. In the last two years, it had 60 listings, almost all local companies. That is almost the same number as the number of local companies listing on the main board in the last two years.

Neither SGX nor MAS requires a profit forecast to be issued by companies in their IPO prospectuses. But if companies wish to provide forecast, then of course, they need to comply with the regulations that are issued pursuant to the Securities and Futures Act.

The idea of a mezzanine fund along the lines of the SBIC in the US is an interesting one. I understand SPRING Singapore is studying that. They are working together with MAS and other agencies to see whether it is viable and whether it provides a useful complement to existing financing schemes.

Next, I move on to Dr Magad's question on Islamic banking, or Islamic finance more generally. Islamic finance is growing globally, at quite a fast clip. We expect that growth to be sustained. We are looking into how Singapore can service this market. But I should add that the larger opportunity for the financial industry in Singapore is the Middle Eastern market, of which Islamic finance is only a component. In fact, the feedback we get from financial players indicates that the bulk of Middle Eastern wealth is managed through conventional and traditional routes rather than Islamic financial instruments as such. So we are looking with a broader perspective into how we are able to service the Middle Eastern market.

MAS is reviewing the appropriate regulatory framework for Islamic financial services and has been seeking the feedback of the industry. The initial feedback is that our regulatory framework does not impede the provision of Islamic

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financial services. In fact, Islamic financial products, such as Islamic deposits, Islamic funds and takaful insurance are already offered in Singapore under our existing regulatory regime. MAS is quite open to admitting reputable Islamic banks which meet our prudential and licensing criteria to set up in Singapore or, for that matter, other reputable banks offering an Islamic window. But our basic approach is to make refinements to our regulations, rather than fundamental change or to set up a separate or new regulatory framework specifically for Islamic banking.

We also do not currently see the need for a national Syariah Council for the purpose of Islamic financial services. Most of the leading players in Islamic financial services have their own internal Syariah Councils or they refer to the Syariah Councils of their clients. Since most of their clients for Islamic financial services are likely to come from the Middle East or from the region around us, they are likely to refer to their domestic Syariah Councils.

This approach that we are taking is, in fact, broadly similar to what the UK has done, ie, accommodating both Islamic and conventional banking within the existing regulatory framework without establishing new infrastructure or a national Syariah Council. The UK's first fully fledged Islamic bank, Islamic Bank of Britain, is regulated under the same framework as conventional banks and operates under the guidance provided by the bank's internal Syariah committee. It has been a successful approach so far and many Middle Eastern financial players and Middle Eastern clients are quite comfortable using London as a financial centre.

As Dr Ahmad Magad rightly pointed out, whether it is conventional or Islamic financial services, whether it is one set or

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separate sets of regulatory frameworks, the same prudential principles will apply - solvency, liquidity, prudent credit practices and corporate governance. The same principles in these areas will apply.

Dr Ahmad also raised the issue of Islamic bonds or sukuks . I quite agree that more companies could be encouraged to issue Islamic bonds or sukuks . There is a growing pool of Islamic investment funds out there and a growing demand for Islamic products internationally. There is a good opportunity for non-Islamic issuers to tap on these funds to diversify their investor base. The German State of Saxony Anhalt, for example, has issued a sukuk . Debt teams within banks in Singapore can take the opportunity to encourage both local and foreign issuers to raise capital for sukuk . This is why in the recent Budget, the Government has given the same concessionary tax treatment to pay out from Islamic bonds as is currently granted to interest arising from conventional bonds. This incentive can help to make sukuks that are issued here more attractive to investors.

Next, I move on to Miss Penny Low's question on MoneySense. Miss Penny Low has raised a few questions. First, whether the role played by industry associations in the programme will compromise its objectivity. We work closely with industry to develop the financial education content in the MoneySense programme. But the programme is driven by the Financial Education Steering Committee which comprises various public sector agencies - MAS, CPF Board, MCYS and so on. It is a steering committee that oversees the programme as a whole, comprising public sector agencies, but we have to work with the industry to provide the content. This Steering Committee has put in place procedures to ensure that any programme endorsed by MoneySense remains

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objective and does not serve to promote specific commercial interests. We do not provide funding for programmes that aim to endorse or promote any specific financial institution or prop up membership schemes. In fact, 75% of the funding that we have given over the last year has been for basic financial education, what we call Tier 1 basic money management, or Tier 2 basic financial planning, rather than education on specific investment tools and techniques.

But I agree with Miss Penny Low that financial education can be most effective where it is tailored to the needs of specific target groups. We need a variety of approaches. There is some use in general public education aimed at ensuring that Singaporeans have the basic skills of budgeting and saving for the long-term and that they understand the basic risks involved in investment. But we also have to customise our programme for specific groups in the population, whether for school children, elderly folk or low income families. In fact, a lot of the MoneySense activities involve close collaboration with consumer organisations, such as CASE, the CDCs as well as Residents' Committees, to reach out to targeted groups with different needs. Last year alone, MoneySense partnered the CDCs to organise more than 80 talks and workshops for the public. Many were customised to the needs of specific groups of people. For example, workshops were organised for families on financial assistance schemes and for single parents. I think Miss Penny Low is familiar with that. We will do more of this in 2005. We are currently working with the CDCs and relevant community groups to develop customised financial education programmes and will start discussions with the VWOs as well.

For the MoneySense programme to be effective, it must be a long-term sustained effort involving collaboration between the

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public, private and people sectors. The $3 million that we have set aside to co-fund MoneySense programmes for the first three years is really seed money to kick-start the national financial education programme. We keep our eye out especially for schemes that help to build lasting capabilities within the community, for instance, schemes that "train the trainers", or schemes that involve follow-on sessions that Miss Penny Low has mentioned. These are things that we keep an eye out for.

Co-funding is currently provided for up to 50% of net qualifying expenses. Miss Penny Low had asked whether we could provide a higher percentage for certain types of schemes, for instance, aimed at the low-income families. We are willing to consider that. Perhaps up to a certain dollar cap, we should be willing to provide a higher percentage of funding.

Next, I move on to Mr Arthur Fong's question on fund management, or about the fund management industry feeling that local corporations are obsessed with fees and expense ratios and not paying enough attention to investment strategies, and so on. Our attitude has to be to let the market work well, but ensure that there is adequate financial education. In case of retail investors, we have the MoneySense programme and we are ramping that up in steps. For institutional investors, we have to operate on the premise that they are sophisticated enough to know what their interests are and be able to scrutinise the information provided by fund managers, particularly with the improved disclosure regime that we have in place.

But it is something which we can consider, whether the Investment Management Association of Singapore (IMAS), working together with the Wealth Management Institute (WMI), can organise seminars for institutional investors to help them evaluate fund

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managers, ie, how you go about selecting a fund manager. In the process, they will probably get a greater depth of understanding of what risk management entails, why fund managers need to go through the full work of evaluating risks and charging fees for various processes and be able to distinguish good fund managers from fund managers that merely have a low fee. It is something that we can look into. I am not sure if the WMI is particularly well-suited for it because its principal purpose is to train fund managers - to develop a strong pool of trained professionals. But we could look into encouraging WMI to work together with IMAS to develop a seminar for institutional investors.

Finally, I move on to Miss Penny Low's question on cash-back schemes, particularly for renovation and car loans. This is different from cash-back in the case of HDB purchases. In the case of HDB purchases, cash-back concerns the CPF Board because individuals are taking their money out of their CPF. The CPF Board has taken action to prevent premature withdrawal of retirement funds. In the case of renovation and car loans, you cannot use CPF funds. The concern is a more general one about making sure that Singaporeans are able to service their loans.

Whether for car loans or renovation loans, MAS expects financial institutions to adopt prudent lending practices and to use fair valuations when granting loans.

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Further, whether it is for HDB property purchases or renovations or car purchases, Singaporeans should also be aware that making false declarations of the purchase price to obtain a bank loan, may constitute a cheating offence. Middlemen who instigate or aid in such practices may also be guilty of the offence.

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As far as insurance policies are concerned, cash rebates are not prohibited by MAS in the sale of insurance policies. However, MAS has market conduct requirements under the Financial Advisers Act that governs this. Financial advisers and their representatives must make recommendations that are reasonable and appropriate to the needs of their clients. They should not use cash rebates as a basis for their recommendations in the sale of investment products, including life insurance policies. The CPF Board requires insurers to return any cash rebates given to CPF members for the purchase of insurance policies under the CPF Investment Scheme to the member's CPF account.

On investment-linked policies (ILPs), MAS does not set charges for investment-linked insurance policies or for any other financial products. These are commercial decisions that are best left to the market. But we do require insurers to disclose clearly all charges and the underlying charging mechanism. These include the mortality charges, the use of the offer price for creating units owned by the person purchasing the policy and the bid price for unit cancellation, so that policy holders could make informed decisions. In practice, insurers include the mortality tables and the product summary in the policy contract.

Miss Penny Low had, I believe, also asked about mortality tables used in ILPs and other insurance products. The common market practice is for such mortality tables to take account of local mortality experience. This means that they factor in changes in local population life expectancy, as well as the mortality experience of insurers' own portfolio when they review their mortality tables. The insurers review their mortality tables from time to time. But it takes several years. It takes several years for insurers,

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not just here, but around the world, to gather sufficient information to update mortality tables, and given the relatively small population in Singapore, this is not something they would want to rush.

The bottomline is that consumers should buy financial products that suit their needs. If they are unsure about their policies they should seek professional help from a financial advisor, especially when considering complex products such as ILPs. A competent advisor should be able to help consumers to analyse their needs and explain the ILPs' features and risks and analyse whether an existing ILP is suitable for the consumer.

Mr Inderjit Singh: Sir, a clarification. The Minister in his response mentioned that the Singapore Stock Exchange does not require profit forecast as a requirement for approval. But I have come across two examples of this being a prerequisite for approval. So I am quite confused when the Minister is saying that it is not. In any case, perhaps, I would bring it up to his attention about the two cases and then we could get the answer to this question of how approvals are made.

Mr Tharman Shanmugaratnam: The profit forecast is not a requirement for a prospectus, Sir. Where a company chooses to project a profit forecast, then there is a set of regulations governing what you could include. The issue manager has to certify that the directors have made the profit forecast on a reasonable basis, the auditor has to also certify that proper assumptions were used behind the profit forecast and so on. But it is not a requirement of a prospectus that you must put in a profit forecast.

I would be happy to get further information from Mr Inderjit.

Mr Inderjit Singh: I would take this off-line. Again, the example I have come

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across is that this is a requirement by the Stock Exchange for the companies to put a profit forecast in the prospectus and they may be ruled by all those things that the Minister mentioned. So again, I would bring the examples up with him. He may not be aware, but perhaps this should be looked into.

Budgeting Approach

Sir, I am happy with the thought of cost control in Government. It is now quite prevalent in our Government agencies. I ask the Finance Minister, however, not to stop at cost control but to take another step and instead of thinking about control, let us talk about real cost reduction.

While we want to compensate our Government officers in the way that we compensate the private sector employees, we should not just think of the upside part of the high salaries, but should get closer to how people in the private sector are also measured. In tough times, they have to go into serious cost reduction efforts to get profits, or just to survive, and most of it happens through real cost reduction and also in permanent overhead reduction. So I, therefore, ask that it is time that we now get serious about cost reduction. While I am happy that we are putting in place a 3% cap on spending last year and a 5% cap this year, on how the budgets are allocated to the Ministries, I believe that these are still not real cost reduction in nature, simply because if you look at the real spending, the spending has gone up from year to year. I highlighted this last year that for the last five years, or even longer, the spending in Government continues to rise and, therefore, it would be better if it could set cost reduction goals compared to previous years' budgets to show some real cost reduction from year to year.

In the same light, on this issue about manpower reduction, while I welcome the

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3% reduction of manpower or whatever targets that had been set, I also have come across practices where the numbers may have reduced but the cost of manpower may have gone up because of the type of people that we hire. So in a real factory example, we may have reduced 100 production operators earning about $1,000 but may have hired 50 engineers that earn about $3,000 or so, the overall cost actually increases. So I would like to ask the Minister to clarify whether the manpower reduction effort has resulted in real manpower cost in terms of payroll reduction.

Sir, another issue that I raised last year, and I would also like to raise this year, is the work done by the Cut Waste Panel. While the achievements are laudable, I believe that more could be achieved. Again, if we look at real cost reduction effort by giving each Ministry or each Government agency cost reduction targets of saving costs, real costs in Government, instead of depending on feedback from the public to suggest to the Government how they could reduce cost.

Perhaps, one way to motivate Government officers to reduce cost is to share some of the cost savings that they have as part of their compensation. So if they could save more than what was targeted, let us share this with them so that they feel motivated that they would get a higher salary if they do a good job in cost reduction.

Budget for Public Relations and Exercises

Dr Loo Choon Yong (Nominated Member): Sir, we are allocating $135 million for public relations and public exercises in FY 2005 for various Ministries and agencies. This is an increase of about $13 million or 15.8% from the previous year. I understand and support the need for better public

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communication to explain policies and educate people, especially in special times like SARS, or when anything untoward happens. And the work of MCYS, MOH and MHA requires this sort of communication more than others. However, in the interest of good and lean Government, may I ask how are we going to spend this $135 million? Are we getting all the bangs that we could for the $135 million? Should we not centralise all these PR exercises so that we could aggregate the purchases and also trap the expertise in public communication and messaging, retain them, so that the messaging gets better and better, just like what MINDEF has done with its central purchasing - saving money?

The next part of the question is how much of this $135 million is for buying media time and space. If it is substantial, then even more so we should aggregate the demand and purchase it together.

Finally, in terms of media time and space, if it is substantial, when the Government is granting permit for broadcasting or newspapers, I am sure it could reserve time and space for this sort of public service announcements and, thereby, reducing the strain on the budget.

Offset Requirement of Defence Procurement

Dr Wang Kai Yuen (Bukit Timah): Sir, yesterday I released a table showing other countries got about $1 back into their economy for every dollar they spent on defence. They do so by requiring defence vendors to participate in compulsory offset programmes which are also known as counter-trade. Singapore, I fear, gets very little back in its defence expenditure. Sir, defence weapon procurement is an expensive consumption expenditure.

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Without offset or counter-trade programmes, very little of this expenditure would give our local economy any multiplier effects.

My question to the Minister is: why do we choose not to engage in offset programmes in our defence procurement, especially when we have structural unemployment, which we do not seem to be able to solve?

In 1999, Singapore procured Apache helicopters for around US$1.7 billion. Four years ago, Netherlands and the United Kingdom also purchased Apache helicopters for US$1 billion and US$2 billion, respectively. But, these two countries required formal offset programmes and, from the data provided, it seems to be that they were able to obtain close to $1 billion and $2 billion in offset into their economy, respectively.

We know that if it is done properly, the incremental cost is around 3% of the purchase price. So, if we had implemented the purchase programme effectively then, we would have a flowback of US$1.7 billion into our economy, at an incremental cost of close to US$50 million. I could safely say that we could have done with US$1 billion or two extra in our economy, even when we were entering into a downturn, starting in the year 2000.

Sir, on a long term basis, our Government is committed to allocating up to 5% of GDP in defence expenditure. Assuming weapon acquisition is around 20% of that number - actually I could not figure out how many percentage is going into long term defence expenditure on acquisition of this nature - then it would be around 10% of GDP. Thus, if we have offset requirement, the positive impact on our economy would be around 1% of GDP, which would be rather significant.

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Sir, in doing my research for this cut, I searched the web and one of the items was the press release by the South African Government in 2000. Its analysts showed that with offset requirement, the expenditure on its weapon procurement would be matched by economic spin-off of the offset. The benefits come in three forms. First, in terms of defence related offset, it is about 20%. Second, by counter-purchase by the defence equipment supplier of South African goods, amounting to about 45%. The goods procured include automotive components, furniture, fabricated metal goods, including railway cars, wagons, electronic goods and so on, thereby creating jobs for the South African economy. And, in the third area, foreign investments in South Africa by a company associated with the equipment supplier, amounting to about 35%.

Sir, of course, this is a statement issued by the South African government. It understands the pitfalls, and the success of the entire procurement offset programme would depend on the mechanism that the Government puts in place to carry out this task and to carefully monitor the progress of the investment and counter-purchase project proposed also identified.

In its report, it is also asserted that this offset programme has been implemented for the past 20 years by many countries. Today, more than 130 countries make use of this offset programme. The report asserted that the offset programme has contributed to countries like Japan and South Korea in real improvement to their industrial development policies across a wider spectrum more than defence alone. So I would like the Minister to consider constituting a multi-agency committee taskforce to look into the virtue of counter-trade requirement in our defence procurement. I note that in other countries the offset requirement is not administered

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by their Ministry of Defence. So I hope the Minister would look into my request.

Manpower Management Framework

Mr Teo Yock Ngee: Sir, first of all, let me thank the Prime Minister, who is also the Minister for Finance, for sharing his concern on this matter. With that, I would just mention a few other points.

In order to better manage, coordinate and monitor the implementation and progress of the above framework for the public service, why not have some form of check and control at the top level? May I suggest that a formal structure be put in place, such as a Steering Committee or Joint Taskforce, for this purpose? While it is fine to leave it to the individual union to deal with their counterparts, or vice versa, by bipartite level, certain standard procedures should be established for reasons of consistency in best practices, of which the Prime Minister had quoted the case of IRAS.

Another reason is that it would appear that this is going to be an on-going process with the aim of a further budget cut of 3% and up to 20% of the non-core functions being market-tested. We have to be mindful of the lack of knowledge or information sharing among the employees as well and this would not be healthy and sometimes could cause the ground to be unsettling. Working together, between the unions and the management, I believe we could manage the framework and its implementation plans more smoothly

and with better understanding. Would the Ministry of Finance consider my proposal for the common good of the Government and its employees?

[Mr Deputy Speaker (Mr S Iswaran)** **in the Chair]

5.00pm

The Chairman: Mr Leong, you may take your two cuts together.

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Performance Indicators for Government Agencies

Mr Leong Horn Kee (Bishan-Toa Payoh): I wish to commend the Government for publishing the Ministries' and their agencies' yearly performance indicators in the Government's expenditure estimates or so-called Budget Book. However, the indicators published should provide useful information. Generally, the public and taxpayers are not only interested in how much money is spent by each Government agency on a specific programme. They are also keenly interested in knowing whether they are getting value for money spent.

Let me quote a few performance indicators that do not give any information whatsoever. For example, under the Ministry of Finance, IRAS publishes the number of annual income tax returns issued yearly. This data in itself has no information or performance measurements. What will be more pertinent is to measure and compare the number of annual income tax returns, for example, processed by each staff yearly, rather than just the number of returns submitted.

The second example is that the Ministry of Transport publishes the operating cost of Ministry's HQ as a percentage on the Ministry's total cost. This again has no meaning in terms of performance measurement. The public will be more interested to know, for example, the cost of construction per kilometre of road built, which is a more important information for them.

The third example is the Ministry of Health. In its mission statement, it is mentioned that it intends to promote health and lower infant mortality. However, the Ministry's performance indicators do not give such statistics. It only gives a performance indicator, for example, on the number of establishments inspected by the Ministry. The public

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actually would be more keen to know the national infant mortality rate or maybe the average time for each consultation at the A&E ward.

I am afraid that the Ministries are merely giving lip service to their performance indicators which are published. Most of the indicators give no information. They seem to be published just for show. In such cases, I do honestly feel that it is not worth the bother of collecting and publishing these indicators. It is waste of time, effort and money.

Sir, the Prime Minister and Minister for Finance in his Budget Statement stated that he had instructed all Ministries to cut another 3% budget cap across the board. I am concerned that such a measure is actually a very blunt instrument. The repercussions are not controllable and some Ministries would simply resort to cut some minor staff positions or chop off programmes that have useful social benefits.

For a more targeted approach, I would like to ask the Prime Minister and Minister for Finance whether he would pass instructions down to all Government agencies and Ministries to do a thorough review of all their respective performance indicators. Ministries' yearly performance should then be evaluated based on output using the indicators as reference. I am sure that this manner of review will lead to a far better financial accountability and more efficient use of funds, thereby creating a leaner and more efficient Government.

Government Accounts

My next cut is on Government Accounts. I wish to raise the issue of accrual based versus cash based accounting practice of the Singapore Government. I note that Australia and New Zealand have converted to accrual based accounting. Corporations and

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businesses have long adopted the accrual basis of accounting for good reasons. Accrual based accounts generally give a better and more complete picture of the state of health of an entity. The main weakness of the cash based accounting is that it is short term. The accounts can show a net surplus for the current year and hide the huge financial losses yet to be realised in the following years. A cash based account does not adequately reflect the cost of future generations of present Government policies and commitments, such as the failure to cater for future infrastructure programmes or social needs. Many countries like the UK, USA, China and India have realised that successive past governments have allowed infrastructures, such as roads, sewers and schools to run down because the cash based method does not need to account for future obligations.

In some instances, the governments do not want to convert to accrual accounting basis because it is more expedient to use asset sales to cover for budget deficits, eg, sale of land, sale of national corporations and even sale of natural resources. The accrual based budgeting system reflects better the total state of health of the national accounts because the accounts show the changing values of assets and also potential liabilities.

In addition, the cash basis accounting creates a curious phenomenon that all Government agencies rush to spend monies allocated in the current financial year's budget towards the end of the financial year. This mad rush to spend the remaining money allocated may cause unnecessary expenses to be incurred or create a distortion to the yearly accounts.

Sir, I note from the Hansard that as far as 12 years ago, in 1993, Assoc. Prof. Koo Tsai Kee had pleaded earnestly in this House for the Government to consider

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converting to the accrual accounting method. However, the then Finance Minister, Dr Richard Hu, turned down the proposal. I hope that today I would not get a stock "no" answer from the present Finance Minister.

Sir, the greatest evil of cash based accounting is that many misdeeds and mistakes of Government can be swept under the carpet using cash accounting. The simplest trick is just to defer payments and expenses to the following year so as to show a profit for the current year. We pride ourselves as a clean and honest Government that would not fiddle with the national accounts. However, to further enhance the exemplary image of good governance, I would strongly urge the Government to consider adopting the accrual basis of national accounting. Although this may be a very massive exercise, perhaps the Minister for Finance would like to consider it for adoption, even if not now, but in the future.

Casino

Mr Steve Chia Kiah Hong: Sir, with the Government's plan to build an integrated casino resort, what is the projected tax revenue and profits from this investment that will go into the Government's coffers? And considering the negative social consequences, what is the expected benefit going to Singaporeans for supporting such a casino project?

With the expected increase in Government revenue, can we expect to see a possible reduction in the GST? Or more reductions in the corporate and/or income tax rate? Or more new Singapore shares to be given out? Or more Medisave and MediShield top-ups for citizens? Or will we see greater Government revenue and expected rise in the GDP figures, because of this casino project translated into higher bonuses for our Ministers and civil servants only?

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Sir, to answer our hon. colleague, Mr Tan Soo Khoon's question to me yesterday, I am hesitant about supporting the casino project here because of the negative social consequences such a project will bring. However, I am prepared to commit and support it if this casino project will translate into less financial burden and taxes for our general population.

Sir, if the Government is prepared to give an undertaking that it will cut GST, corporate and/or personal income tax further once the casino revenue comes in, then I will be more prepared to speak in support of this integrated casino resort project. Otherwise, there is no deal.

Tobacco and Liquor Duties

Mr Ong Ah Heng (Nee Soon Central) (In Mandarin) : Sir, the Prime Minister and Minister for Finance said just now that because 2,500 people die every year from tobacco related diseases, the Government increased the tobacco tax to prevent this. According to official statistics, a lot of older people smoke. Why do we increase tobacco tax and not liquor tax? If people drink and drive, it will also cause a lot of deaths. So I tell some people that next year, the liquor tax will surely go up. But they told me that because our Ministers and MPs drink, therefore there is no increase in the liquor tax. Since Ministers and MPs do not smoke, the tobacco tax was increased. I would like the Minister to explain why the liquor tax is not increased this year.

The Acting Second Minister for Finance (Mr Raymond Lim Siang Keat): Sir, I would like to thank Members for their comments and suggestions.

To begin, I think it is useful to put things in context. I think it bears repeating the changed fiscal environment that we

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are living in right now. Going forward, our revenue growth will be slower, because the economy would have more moderate growth. And against that, there will be persistent pressure for spending to increase because of demographic changes, ageing population, structural changes and vulnerable workers. More than ever, we need to husband our resources carefully and spend prudently. We must continue to establish limits on our spending through budget ceilings, maximise discretion, ensure the best value for money and, like Mr Leong Horn Kee said, measure performance accurately.

Let me now turn to the need to establish limits to budget ceiling. This is a point germane to what Mr Inderjit Singh brought up. He says that we should have stringent cost control. He says that one way to do that is to incentivise staff by sharing the benefits when there is a suggestion that leads to cost decreases. We have various schemes to do this. One way in which we have done this is that we have introduced Net Economic Value in the Ministry's cost assessment. And if there is a positive delta in the net economic value, some of the gains will be shared with the staff.

I think the overall picture is important. If you look at what we are doing to ensure that we have a lean and trim government, and you compare that on an international basis, this is how it looks like.

Singapore's public spending share of GDP is already among the lowest in the world. Our total expenditure is about 17% of GDP, very low, compared to 40% in the UK; 54% in France; 50% in Denmark and 55% in Sweden. Unlike many other countries, we have been able to prevent public spending from spiralling upwards by setting pre-determined caps for the overall Government budget. This means establishing limits by setting Ministries' budgets as a percentage of GDP.

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Our operating revenues have averaged about 16%-17% of GDP in recent years, and we expect this to be the case over the medium term. Thus, the limit we have set for total expenditure is also about 17% of GDP. This global limit sets the parameters for establishing the block budget caps of the Ministries.

We have cut the budget caps of Ministries across the board, like Mr Inderjit Singh said, by a total of 5% - 2% in FY 04 and now 3% in FY 05.

Mr Inderjit Singh brought up the point: why not a permanent cut to the budget allocation of Ministries in dollar terms? However, if we were to do that, it means a real cut in Ministries' spending. It is an absolute reduction in the amount of resources available to Ministries to carry out their functions. Government is a people-intensive operation. Costs and wages tend to track GDP growth rather than last year's costs.

Ministries also require some certainty and stability in their budgets to carry out their operations. Commitments in infrastructure, for example, require sustained investments over a few years. If we chop and change budgets from year to year, Ministries will not be able to plan properly for the future. So it is far better that they have a formula that they can work to but, at the same time, make plain that their budgets will go up and down with the state of the economy. This forces Ministries to optimise on their allotted resources. Ultimately, we have to determine the appropriate size of the Government in relation to the size of the economy.

If the economy is growing, it is not possible for the public sector to shrink in absolute terms because the demands on the public sector will grow as the economy grows. But we will strive to keep the growth of Government's spending within nominal GDP growth so

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that Government's spending remains bounded at a constant percentage of GDP.

5.15 pm

Now, if we expect to be firm on budget ceilings, we must provide Ministries maximum discretion on how they spend their budgets. This makes sense because Ministries know their businesses far better than MOF can or should. By maximising discretion, we also prompt Ministries to seek more innovative and cost-effective ways of achieving their desired outcomes within their budgets. As part of maximising discretion, we have introduced budget flexibilities, such as carry forwards which allow Ministries to carry forward to future years' budgets that they are entitled to but do not need for that year, advances which allow Ministries to borrow against their future years' budgets to meet more urgent current needs and automatic rollovers which allow Ministries to bring up to 5% of their unspent budgets for that year to the following year. Because of this budget flexibility, the year-end spending spree that has, at times, been a problem for Ministries, has been alleviated. With carry forwards and automatic rollovers, there is really no need for Ministries to rush to spend their money at the end of the financial year. Nevertheless, we must recognise the expenditure for the last quarter would tend to be higher than the previous quarters. This is a natural outcome of conservative management of expenditure budgets. Where it is necessary to spend on an item, but there is some flexibility on timing, it makes sense for the Ministry to delay its expenditure to later in the year, because, you never know, more urgent or more pressing matters might come up. However, as risks of unexpected event abate towards the end of the financial year, the Ministry can then proceed to

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spend on items which are not so pressing but still necessary.

Let me now turn to the other element which is to ensure that we get the best value for money. Public expenditure management is not just about getting our allocations right. The Government also has a responsibility to continually seek the best value for taxpayers' money. This is why we put in place initiatives such as Best Sourcing, the Manpower Management Framework, Economy Drive and the Cut Waste Panel. The Prime Minister has already addressed concerns on Best Sourcing and the Manpower Management Framework.

Mr Teo Yock Ngee said that we should have very close consultation with the unions. I fully agree with him. This is very important because we accept that the ongoing efforts in restructuring, computerisation, streamlining in terms of processes and best sourcing in the public sector, might lead to redundancies. In these instances, communication with the affected staff is of utmost importance. Agencies will continue to work very closely with the unions and consult them regularly. They will give early notice to the staff affected and, as far as possible, redeploy them within the agency. Retrenchment should only be the last resort and affected staff would be released from the service on fair and reasonable terms. In addition, agencies will assist staff in the transition to new jobs, for example, by working with the Workforce Development Agency.

Next, the Economy Drive. The results from the Economy Drive, now in its second year of implementation, continue to be encouraging. Public agencies have been actively implementing economy drive initiatives. They will result in savings of about half a billion dollars in FY 2004.

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Dr Loo Choon Yong asked, in this context, if there is a more cost-effective way to carry out Government's public relations and exercises (PRE), say, by centralising all such functions under MICA. Our PRE expenditure covers a whole range of things - official visits by foreign dignitaries, conferences, workshops and seminars organised and funded by the public sector, campaigns and public education exercises such as Total Defence and mass media programmes. The biggest users of our PRE expenditure are MHA, PMO, MTI, MICA, MFA, MCYS and MINDEF. I know that Dr Loo will agree with me that in each of these instances, the demand for Government to do more by way of public education and communications has increased.

Post-September 11, MHA's public education efforts on civil defence and MINDEF's messages on Total Defence obviously have to be stepped up. Diplomacy and trade promotion efforts that come under MFA, MTI and PMO also have to be increased as we build up our relations with other countries. And the public education campaigns, under MICA and MCYS, are essential for social and community development. There is a wide variety of public communication messages and activities and it would simply not be practical or wise if we bring them all under one agency.

Dr Loo also asked about our mass media expenses. This is actually very low. It is less than 10% of PRE expenditure; it is about 7%. On the media carrying public education messages for free, we must be realistic and not expect the media to do advertising and promotion for free. The media is already doing their part in communicating the messages to the public, through news reports and commentaries.

Mr Inderjit Singh asked whether or not the Cut Waste Panel is useful and whether it has sufficient traction. As at

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1st February 2005, the Cut Waste Panel has received more than 3,100 suggestions. It has agreed with the points of feedback raised in 85% of the suggestions relating to wastage in the public sector. Of this 85%, 3% contained new ideas which should be implemented, 24% raised ideas that the public agencies are already doing and 58% contained feedback which the agencies have already taken into account in current practices and policies. It is understandably difficult for the public to suggest major changes for the public service as they are not familiar with the detailed workings and processes in the public sector agencies. But, nevertheless, we have had some very useful suggestions. One suggestion was that MINDEF's GP cars should use lower grade petrol, ie, 95 octane rather than 98 octane, because they are driving on normal roads, and these have saved the Government about $10,000 a year. Another suggestion has led to the Traffic Police sending requests for the particulars of offenders by registered mail, only if the recipient failed to respond to the first request sent via ordinary mail. That has saved the Government $113,000 annually.

I now turn to Dr Wang Kai Yuen's pet subject for this year's Budget. He suggested that we consider the use of offsets in Government's defence procurement to help create jobs for locals, and the Government should set up a multi-agency committee to further study this. We do not practise offsets for general Government procurement. Not only are offsets incongruent with our general economic policy or free market competition, but they are also in violation of our WTO obligations on general Government procurement and our commitments under our various bilateral Free Trade Agreements. Although the WTO GPA does offer one, and only one exception, which is pertaining to "procurements indispensable for defence purposes", there is no compelling reason

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for MINDEF to depart from the 'clean price' policy in their major acquisition programmes.

The link between offsets and job creation for the Singapore economy that Dr Wang makes is also a tenuous one. Whether it is "Economics 101" or "Economics 501", the basic lesson of economics is that there is no free lunch. If we want defence procurement to also serve our job creation objectives, somebody has to pay for it. And the question you must ask yourself then is whether incurring higher costs for defence procurement is an effective way of helping our local workers. In the past, MINDEF had used offset to some extent. But the benefits, in terms of technology transfer to local companies, job creation for local workers and additional value-add for the Singapore economy, were found to be limited. We are therefore not convinced that the uncertain benefits of offsets are worth the higher costs of defence procurements that the Government will have to bear.

Now, I turn to the point that Mr Leong Horn Kee brought up, which is on key performance indicators (KPIs). This is important because if you are going to give maximum discretion to the Ministries, in terms of their allotted budget, then there must be some way to ensure accountability, and I agree with him. Mr Leong has suggested that all Government agencies state and publish appropriate key performance indicators. We have right now, as he pointed out, key workload and performance indicators in the Estimates book, which I think he referred to. I think some are realistic and some, perhaps, could be improved upon.

Performance indicators need to be observable and verifiable to provide meaningful analyses. They also need to be adjusted as needs and priorities change. The problem is that, sometimes, the indicators that are very easily measurable

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are not very relevant to the desired outcomes, and those that are relevant to the Ministries' desired outcomes are quite difficult to measure. But we will keep on looking for good KPIs. We will take into account the suggestions that he has made, and if he has any others, he should let us know. The Ministry of Finance would be happy to hear them.

Mr Leong has also suggested that the Government move to be more like companies and adopt the accrual basis for national accounts. In adopting the basis of accounting, we must be clear about the purpose for which the accounts are being drawn up. The main reason why companies prepare their accounts on an accrual basis is to allow a better match of their costs and revenues for profit reporting. In fact, over and above the accrual accounts, many companies track their cashflows religiously as a key operational and management tool. Our statutory boards maintain their accounts on an accrual basis to better define their operating surplus or deficit. However, the Government's budget, which is submitted to Parliament for approval, is based on a cash basis because this gives Parliament the most direct control on the resources to be made available to Ministries. The imperative of accrual accounting to define profits does not apply to the Government, because the imperative of cash accounting to direct control resources for expenditure is overriding. But Ministries apply elements of accrual accounting to enhance their financial and resource management. For example, when a Ministry needs to know the total costs of delivering a service, and it decides to fix a charge for it, it will supplement its cash cost with accrual elements like the depreciation cost and imputed rental of a Government facility.

Ministries are also required to keep a fixed asset register to track physical

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assets and to calculate the depreciation of these assets. Governments in most countries are still relying on cash basis of accounting for financial reporting and budgeting. The key advantage of the cash basis is it is simple, objective and prudent. It instils discipline in the allocation of budgets. It would not allow a government, for example, to make a $300 million expenditure on a facility look like a $10 million commitment which is the annual value of the depreciation if taken over 30 years.

MOF officers have been following closely the development of public sector financial reporting in other countries. We are aware, as Mr Leong pointed out, that in certain countries, like New Zealand, Australia and the United Kingdom, they have implemented the accrual basis of accounting. Their experience has been mixed - on whether the additional complexity and effort of accrual accounting have indeed led to better expenditure control and discipline, or the cash control is in the end the most direct way to influence government programmes. Mr Leong asked, what about the future, will that change, well we will keep on monitoring this - and as you know, in life, "never say never".

Let me now address the other issues Members have raised. Mr Steve Chia has asked what we intend to do with the tax gains that the Government expects from the casino. Let me remind Mr Chia that we have not yet decided to have a casino. We are still studying the feasibility of an Integrated Resort in Singapore, including the option of having a casino as part of such a resort. Now, the strategic objective is tourism growth rather than revenue. It is to expand our range of tourism offerings. The whole economy benefits if we have more tourists, and they stay longer and spend more. But there are negative effects on society which we have to consider carefully before a final decision is taken on the

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casino.

So, it is too early to speculate on the tax revenue that a casino might bring.

5.30pm

Quite frankly, I do not understand why Mr Chia thinks that bringing in a casino into Singapore would lead to bigger pay cheques for civil servants and Ministers. Many arguments - and I follow these quite carefully - have been made on whether or not we should have a casino. But no one has made the extraordinary leap that Mr Chia has made on this particular matter.

Mr Ong Ah Heng made a very colourful speech. He asked whether we are unwittingly penalising older Singaporeans by raising tobacco duties. We are not. As Mr Ong has alluded to liquor duties, that perhaps Ministers or civil servants might have a particular partiality for good wine, I would like to assure him that when we decide to raise duties, be they on tobacco or any other matter, we always do it soberly.

In this case, we were motivated by serious public health concerns which cut across age segments, and in particular the young. Seven Singaporeans die each day from smoking-related causes. The problem has been compounded by the prevalence of low-price cigarettes which makes smoking more affordable. Each pack of low-price cigarettes costs $1.00 to $3.00 less than conventional brands. More are turning to low-price cigarettes rather than quitting. 42% of smokers in Singapore today smoke low-price cigarettes compared to only 33% just one year ago. Studies have shown that higher tobacco duties do encourage more to quit and fewer to start. We have been progressively raising tobacco duties over the years, and this has helped reduce smoking among the population at large. But, as I said earlier, we are actually concerned about the young, and young women in particular. In 1992, 2.8% of

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women aged 18 to 24 smoked. By 2001, this has tripled to 8.2%. We decided to further raise tobacco duties this year to help curb smoking, especially among younger Singaporeans. I hope that they will think twice before picking up the habit. I also hope that existing smokers will seriously consider quitting.

Sir, our fiscal landscape has changed. The era of large budget surpluses is over. International competition is driving our taxes down, while demographic changes are driving demands in public expenditure up. The norm, going forward, will be fiscal tightness. The need for sound fiscal management is thus all the more critical. Sound fiscal policy, a lean and trim Government, and a low tax burden contribute directly to the economic well-being of Singapore. They sustain investor confidence and free up resources for the private sector. By remaining lean, efficient and effective, the Government creates the enabling conditions for a more dynamic and entrepreneurial economy while providing adequate services to meet the needs of Singaporeans.

Mr Steve Chia Kiah Hong: Sir, I seek a point of clarification. The purpose of the Integrated Resort is to promote and increase tourism. Would increasing tourism not help to increase our GDP and indirectly increase Government revenue? At the same time, with the tax revenue that we collect from the casino, if we have a casino, would it not add to the Government revenue? All these increases in our GDP and GDP growth, would they not result in bigger bonuses for Ministers and civil servants, since bonuses are pegged to the growth in the GDP? That is my first point. Secondly, the Minister has not answered whether it is prepared to give an undertaking to cut the taxes, if revenues are coming in from the casino.

Mr Raymond Lim Siang Keat: I think we need to put this in context. If we have a casino, it is not a magic bullet, that once

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we have that, it is a quick-fix and the economy will then start going on a sustainable growth path. If we do have a casino, it is but one of many initiatives that we are introducing to enhance economic growth. So, it contributes to it.

The second point that the hon. Member brought up, whether we will give an undertaking if, due to the casino, there is this huge surge in our tax revenue and whether, because of that, we will start to cut all the other taxes. Firstly, it is unlikely to happen, because it is just one particular element of many things that have to be done. Secondly, we already seek to keep all taxes as low as possible. This is the overall policy. In terms of whether or not and how much revenue we are going to get from the casino, right now it is premature, because we have just got the concept proposals in, so we do not have the numbers.

Mr Steve Chia Kiah Hong: Sir, if the Minister by his answer says that we may not collect much revenue from the casino, then I do not see the point why, after considering all the negative social consequences, we should still go ahead with the casino project. We are prepared to support having a casino if it is bringing in revenue for the Government and that results in lower taxes for the people.

Mr Raymond Lim Siang Keat: That is not quite right. Whether it is a casino or a biomedical hub or promoting Singapore as an education centre, why we are doing this is to generate economic growth, so that there are economic benefits for all Singaporeans. When we do this, it is not in order to raise our tax revenue. In fact, the way we are proceeding with the casino is to ensure that we have a competitive tax structure, not to maximise the amount of revenue we want to get, but really to maximise economic growth

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for Singapore by taking initiatives like these.

Sports as Charitable Purpose

Assoc. Prof. Chin Tet Yung (Sembawang) : Mr Chairman, one of the most heart-warming parts of the Budget speech to many, I think, without a doubt, is the part on promoting community development and philanthropy. Almost to a man and woman that I have asked have welcomed the approach taken by the Government, particularly in relation to recognising sports as a fifth charitable purpose. Many say, "It is about time", "It is an excellent move", and "Well done, Minister for Finance."

Much has been talked about sports before and how difficult it is to find money to fund sporting activities. Efforts from some of us, who have been advisers to football clubs, have failed and we have not been able to induce Mr Roman Abramovich to come to Singapore to fund certain clubs. We all know that the salary of one Chelsea player can fund the whole team in Singapore easily, maybe a couple of teams, depending on which teams we are talking about.

So, one can only have praise for the move to recognise the advancement of sports as a fifth charitable purpose. It is a bold and novel move, and it may very well work this time when none has worked so well before. More donors will now put money into sports, and many sporting associations will no doubt benefit from this. But, at the same time, one wonders whether from the fifth charitable purpose it will become the most popular charitable purpose. The reasons are obvious. With naming opportunities and extensive media coverage of sports, many corporations may find that donating to sports is an excellent way of getting publicity where they have not advertised before.

So, the question that we need to ask is whether this would have an adverse

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effect on donations to other charities when funds now move to sports rather than other charitable purposes. In this respect, I want to ask the Minister a few questions. The first is this: what is the scope of this charitable purpose of advancement of sports? If we talk simply about healthy lifestyle, it could easily have been included under the other head of "purposes beneficial to community", which has been defined to include advancement of health. Putting a separate purpose, ie, advancement of sports, as a separate head of charity seems to suggest something else. Is it suggesting that we want to encourage charitable support for competitive sports? I think that many want to see Singapore do well in international competitions and so on and, if that is the case, what sort of sponsorship are we looking at? What sort of sports are we looking at? How do we decide which sports to support, and how should we allow corporations to donate to sports? Do we, for example, allow naming rights? Do we allow them, in other words, to advertise and, at the same time, get charitable relief? If so, as I said earlier, sports will definitely be the most popular charitable purpose, and this might divert funds from other charitable purposes.

The other point that I wish to make is that now that the advancement of sports is regarded as a charitable purpose, I hope that more attention be given to the developing and nurturing of sports individuals rather than associations. In many cases, we may want to support a Tiger Woods or an Andrea Agassi or whoever it is, to give Singaporeans sporting heroes rather than just Singapore Idols, although somebody told me that moving one's mouth is also a physical assertion and therefore should be regarded as a sport, as is the shuffling of cards.

At the end of the day, I think all of us want to see Singapore doing well in sports, both internally as well as

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internationally. I do think that this addition of a fifth head of charitable purposes would indeed add to our sporting improvement in both fields.

With that, we fully support it, but we would like to know how exactly this charitable purpose would work.

Institution of Public Character Code

Dr Chong Weng Chiew (Tanjong Pagar) : Sir, the Council on Governance of Institutions of Public Character (IPC), at the end of last year, has published proposed guidelines seeking feedback from current IPCs. The proposed guidelines cover almost every aspect of the administration and operation of charities, from fund-raising practices to financial management, from financial disclosure to recruitment and staffing practices. It includes checks at every level of the fund-raising process, especially for fund raisers that bring in more than $1 million in cash.

While most VWOs and donors welcome the recommendations for more transparency, implementing many of them comes at a cost, both in terms of time and resources. For example, the Ministry of Finance and the Commissioner of Charities' Office in IRAS have proposed that charities make available online financial details, such as all incoming receipts, including donations, grants, membership fees, investment income. Other information includes expenses incurred, the balance sheet, the total wages of the top three key employees, and their ratio of reserves to annual expenses. Without a doubt, this will result in extra administrative burden. Implementing the rules requires elaborate computer systems, more manpower to track, distribute and monitor every event, and this costs money. Ultimately, the donors will have to pay for it. Staff at the VWOs also get the sense that they are not trusted and they feel demoralised. May I

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suggest that we ease up on some of the requirements and, to counteract any potential abuses, put in place avenues for reporting of abuses, a framework for investigation, heavy penalties for those who have been discovered to have abused the trust of the Government and the public. That is not to penalise all the good and sincere IPCs while we try to sieve out the black sheep.

5.45 pm

Goods and Services Tax

Dr Ahmad Mohd Magad : Sir, I read with concern an article in the New Paper dated 13th February with the caption "Broke but must pay $30,000 GST". The article is about a charitable organisation which has to fork out the said amount in GST despite being $100,000 in the red. I suspect that many charitable and voluntary welfare organisations (VWOs) which do not come under the umbrella of the Community Chest are currently experiencing a serious plight. The majority of them have difficulties meeting their donation targets, especially in the last several years of the uncertain economic climate and unforeseen events such as SARS, and the more recent tsunami disaster. The increased competition for the charity pie among more than 1,700 charities here is also stiff. Donors are also fatigued by the many repeated requests for donations from the same sources. As a result, many VWOs also went into deficits.

Sir, part of the problem here stems from VWOs not being able to claim GST incurred in their operating expenses from the Government, unlike commercial business organisations. Also, a $5 million input GST grant which was meant to cushion the impact of GST of VWOs and small charities has lapsed quite sometime back. Charities and VWOs play an

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important role in rendering meaningful services to Singaporeans and complement many services rendered by the civil service, particularly by social agencies. In view of the current economic difficulties faced by many VWOs and small charity organisations, I would like to ask the Minister if he could consider reviving a similar GST grant for another five-year period to ease the burden on such organisations.

Charities and Voluntary Welfare Organisations

Ms Eunice Elizabeth Olsen (Nominated Member): Sir, I believe, at last year's Committee of Supply debate, the Finance Minister was asked not to levy the goods and services tax on structures built for and items bought by the disabled. The answer was no.

This year, I shall try a different tack as the intent behind the call to help our voluntary welfare organisations is a good one. Most of our charities are small. They generally raise small amounts and run up higher overheads in fund-raising. The ability to provide services at a nominal cost gets affected by rising costs. At the same time, to ensure they remain tax-exempt organisations, registered charities must spend 80% or more of its total receipts on its charitable objectives.

Although the GST rate has risen from 3% to 5%, this rule did not change. The hike means that welfare groups must raise more money from the public to pay GST, especially for big ticket items. Of course, the GST is here to stay and charities cannot be shrouded from it. I am not asking for them to be exempt from paying GST but, given the Government's "spend less, tax less" philosophy, the job of caring for the poor or other disadvantaged groups falls mainly on their families or the VWOs. So if there are ways to support our charities, we should do so.

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The Government already helps to fund approved programmes run by VWOs but it does not want a culture of entitlement to take root in Singapore. Then why not allow a charity to claim input tax credits for all taxable purchases used to carry out voluntary activities that meet its charitable objectives? It would be like how any GST-registered company can claim an input tax credit for things that are used to make taxable supplies. I know that in the case of VWOs, activities like providing free services for the benefit of the public do not constitute taxable supplies. Now they can only claim a portion of that input tax credits. But if the intent is to support our charities in the long term, its specific outcome is good, should we not tweak the GST law to achieve our social objectives as laws are meant to do? After all, it is not the activity that is non-taxable. If a company were to provide meals and goods for a segment of the public for payment, it would be taxable. If a charity were to do exactly the same, but for free or subsidised without commercial returns, it would not be taxable.

So let us allow a charity to claim all input tax credits as opposed to a portion for all taxable purchases for activities that meet its charitable objectives even if they do not constitute taxable supplies, unless actual harm can be shown to be done from this move. I propose that this be offered to VWOs which provide direct welfare services that benefit a specific group, for example, resident care for the elderly, day rehabilitation for the disabled and home help for the disadvantaged families. And it would start with smaller VWOs whose turnover is less than $1 million a year. It should not be difficult to do this if we really want to do it.

The Minister of State for Finance (Mrs Lim Hwee Hua): Sir, let me thank Members for their comments and questions.

Sir, there is a Chinese saying, " yuan qing bu ru jin lin ", or simply, that a

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neighbour close by is better than a relative living far away. As the family size shrinks, the extended family and the community will play a more crucial role in providing companionship, sharing common interests and offering support to Singaporeans in time of need.

The people sector will increasingly be a key pillar in building the Singapore community. Institutions of a Public Character (IPCs) are key people sector organisations. They have done much good work, providing a wide range of programmes from helping the needy to promoting the arts. IPCs have mobilised and energised Singaporeans in a constructive way, and enhancing social responsibility towards the larger community. Public support for our IPCs has grown, on average, by about 15% a year in the last four years. In 1999, Singaporeans donated an aggregate amount of $300 million to IPCs and this amount has increased to over $500 million by 2003.

Sir, Singaporeans are a generous people. In last Sunday's Lianhe Zaobao , Miss Xie Lixuan, a reporter of Shin Min Daily News , recounted how she was personally moved by an elderly man who handed her $100 to help the Yishun siblings who are suffering from a disease which causes their nervous systems to degenerate. The man was in his 70s and lived far away from the Media Centre but he asked her for the bus number and insisted on handing her the money personally. He arrived more than an hour later in sweat, handed her two crumpled $50 bills and left. The elderly declined to be interviewed, refused to have his photograph taken and did not leave his name behind. This is truly a case of " you xin bu pa yuan ".

When there is a need, Singaporeans always respond to the call and never hesitate to go out of their way to help. Under the leadership of my parliamentary

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colleague, Mr Ong Ah Heng, the grassroots and the media, a total of $260,000 was raised for the siblings. Sir, this is but one example of the Singapore community in action.

To encourage even greater public support, IPCs need to preserve confidence and assure the public that they subscribe to good governance, accountability and transparency. This means defining some common standards and best practices. But, Sir, to what extent should this be done? I agree with Dr Chong Weng Chiew that we must do this in a sensible way, balancing the benefits of regulation against the cost of compliance. We must adopt a risk-based regulatory approach that targets rules at areas of greatest risk or which gives rise to public concern. We must also recognise that IPCs vary significantly in size and expertise. For large IPCs raising substantial amounts from the public, rules may be needed to ensure accountability. However, the same rules could well be inappropriate for the smaller IPCs.

The Council on Governance of IPCs set up by the Ministry of Finance has developed a set of recommendations for suitable standards of governance for IPCs. These are preliminary recommendations. The Council will view them after carefully evaluating the feedback that they have received from the different stakeholders, including IPCs and members of the public. The Government will then consider the Council's final recommendations.

Let me assure Dr Chong and Members that we will not adopt a one-size-fits-all approach. Our intention is to nurture and groom the people sector to play an even bigger role in our society and, certainly, not to stifle its growth with onerous rules. We also believe that IPCs would and should themselves be responsive to the needs of their various stakeholders and

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adopt practices that best serve their own individual needs.

Sir, as mentioned in the Budget Statement, to support the growth of the people sector, the Government will explicitly recognise as charitable purposes several initiatives which we now group under other purposes beneficial to the community, namely, the advancement of health, the advancement of citizenship or community development, the advancement of the arts, heritage and science, the advancement of environmental protection on improvement, the relief of those in need by reason of age, ill health, disability, financial hardship or other disadvantaged and, finally, the advancement of animal welfare.

At the same time, we will also recognise the advancement of sport in so far as the sport advances health, which is itself a charitable purpose. This is because we want to recognise the importance of sports in promoting a healthy lifestyle for all. In 2003, the UK, likewise, recognised sport as a charitable purpose. Community amateur sports clubs in the UK already qualify for charity status. I would like to thank Prof. Chin for his suggestions on how we can draw up the qualifying criteria for the type of sports and sports organisations. We will work out the criteria over the next few months, in consultation with the Ministry of Community Development, Youth and Sports, the Singapore Sports Council, the Singapore National Olympic Council and the sports community. Let me assure Prof. Chin and Members that we will adopt an inclusive rather than an exclusive approach. However, the guiding principle must be sports which promote good health and physical fitness. The consequence could, of course, be an enhancement of the competitive standards. As regards the extent to which Government funding of expenses should be given between the different sporting associations or the VWOs, I would

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suggest that the Member raise this under the Head for MCYS.

To encourage charitable giving among individuals and corporations, the Government will grant double tax deduction not only for outright donations, but also for donations with naming opportunities. Donors who name an IPC, an IPC facility or an IPC event, can thus qualify for double tax deduction. This applies to donations to all IPCs, and not just IPCs which promote sport. It should therefore not skew corporate giving towards sport which Prof. Chin was concerned about. Companies frequently have a well-defined focus for their corporate social responsibility initiatives. What we want to achieve through this change is for more donors to come forward to support sport, the arts, the environment, the needy or any other charitable cause they feel passionate about, and to build lasting relationships with the beneficiaries they have lent their names to. Let me reassure Prof. Chin that while we now encourage naming donations, we will continue to disallow double tax deduction for outright advertising such as banners.

Next, let me thank Dr Ahmad Magad and Ms Olsen for their suggestions on what more the Government can do to help VWOs especially with the cashflows. Although I understand the Members' concerns, I am afraid that the answer is still "no". I do not think that giving VWOs a GST refund or relief is the best way to go. Let me explain why.

Sir, we deliberately designed our GST as a simple and broad-based tax. It is applied to all goods and services consumed locally, except financial services and the sale and lease of residential properties. This means that other than GST-registered organisations, all individuals and organisations, including VWOs, cannot claim the GST incurred on their local consumption. This keeps the

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GST system simple and helps to reduce compliance cost for everyone. Rather than complicate the GST system with separate rules for VWOs, a better way will be for Government to provide targeted help for VWOs on the GST expenses.

When GST was introduced in 1994, the Government increased its assistance grants to VWOs to include the GST component. This policy remains unchanged to this day.

Government grants for VWOs include help to meet GST cost. Such VWOs include the Muhammadiyah Welfare Home, the Movement for the Intellectually Disabled in Singapore (MINDS), the Lions Home and the Dover Park Hospice. Government assistance in development costs, where the assistance could be up to 90% of the building cost, includes the GST component as well, and Government grants for operating cost include the GST component as well. Hence, there is no need for a separate input GST grant as the earlier grant was transitional in nature.

6.00pm

The Government appreciates the good work that VWOs do in providing vital community services. In addition to assistance grants, the Government supports VWOs in other ways. For example, VWOs which qualify for charity status are exempted from income tax if they spend at least 80% of their annual receipts on charitable objects in Singapore, within two years. They are also exempted from property tax for those premises used exclusively for charitable purposes. VWOs which qualify for IPC status can allow the donors to claim a double tax deduction on the donation. This would help VWOs attract more donations.

VWOs which already have both charity and IPC status include the Asian Women's Welfare Association and the Spastics Children's Association of

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Singapore. For this Budget, the Government has announced a package of additional incentives to promote community involvement and philanthropy. These incentives demonstrate the Government's desire for the people sector to grow, build up strong community spirit and encourage and engage citizenship.

Sir, charity must be conveyed with the heart and with willing hands and not delivered impersonally by a faceless bureaucracy. If everything is done by the Government, we would simply be building an entitlement mentality. Singapore's strength must lie in the willingness of the strong, the able and the successful to care for those who need help.

Dr Wang Kai Yuen: Mr Chairman, we still have time. I seek your permission to ask some questions.

The Chairman: Yes.

Dr Wang Kai Yuen: I asked two questions in the debate on the Budget Statement. The Minister did not respond and he said I could ask the details in the Committee of Supply. My first question was on NII - why is the NII proportion this year dropped by 30%? The second question was on vehicle tax. Why was vehicle tax increased at the same time when the projected quota premium collection decreased? Perhaps, with your indulgence, maybe the Ministry can clarify.

The Chairman: It is not quite a clarification. Does the Minister wish to take it now or later?

Mr Raymond Lim Siang Keat: I will take the Member's first question on NII. He was comparing figures for last year and this year and he asked why there was a drop. Last year, there was a special dividend from Temasek. But, on the

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whole, the average figure is about 1.2%, which is the figure we see in the Budget Statement.

Dr Wang Kai Yuen: I have looked at the Budget Statement and see that the vehicle related taxes go up this fiscal year, but concurrently the quota premium collection is projected to decline, also by a similar proportion in the coming fiscal year. So my question is: if we levy the collection based on the same number of vehicles, how is it that, on the one hand, tax goes up; and, on the other hand, quota premium drops?

Mrs Lim Hwee Hua: Sir, the projections are based on a whole host of assumptions which relate to the vehicle population growth, the rate of deregistration, as well as the projection into COE premiums themselves. The net result is as what the Member has just described.

The Leader of the House (Mr Wong Kan Seng): Sir, I think we are managing our time very well. One of the reasons why we have made some modifications to this year's Committee of Supply, by asking MPs to limit their speeches in the whole Committee of Supply to 18 minutes and 20 minutes for GPC Chairman, is to allow this free flow of debate and questions, for a more interesting exchange. Information could be shared and Members could ask more questions. So Members are encouraged to do so. If Members still have questions, please raise them, but they must be related to the Finance Ministry and, hopefully, related also to the cuts that were being made. If Members ask for some old data, for example, the Ministers may not be able to answer them immediately as they are not walking encyclopedia.

Dr Loo Choon Yong: Mr Chairman, Sir, yesterday I brought up this question of the 80/20 percent rule, that 80% of the donation must be spent in Singapore. I wonder whether we are prepared to

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abolish this rule or, at least, make sure that the Commissioner grants exemption more freely to bona fide organisations with activities in the region.

Mrs Lim Hwee Hua: Sir, where it involves granting tax exemption, certainly the conditions would have to be stringent to ensure that the benefit flows back, hence, the 80% rule. But we would certainly evolve the system as we go along and we would bear that suggestion in mind.

Dr Loo Choon Yong: We have noticed from the recent tsunami crisis that we win a lot of goodwill from our neighbours. So, if we actually have more people-sector volunteers going into the region, doing a lot of mission, it would actually be good for Singapore when we exhibit our good neighbourliness. I would urge the Ministry to seriously think about this. If it is not 80/20, how about 50/50, and only for bona fide organisations?

Dr Teo Ho Pin: Mr Chairman, Sir, I especially asked in the debate on the Budget Statement about the increase in the skilled foreign worker levy. I mentioned that because a lot of construction and marine contracts were called on for a certain period, if we increase this levy, it is not fair to the contractors and also the shipyards because they have already tendered based on the old amount of foreign worker levy. So I am asking whether the Finance Ministry would take my suggestion to only increase the levy for new foreign workers, whereas the existing foreign workers should be paying the same rate.

Mr Raymond Lim Siang Keat: Dr Teo might want to raise this specific point under the Manpower Ministry, Head O. But it is being phased in right now - in July, and then in January - to take into account this sort of transitional arrangement.

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I just want to come to Dr Loo's point, because he mentioned the tsunami case. What we did in the tsunami case was that we granted exemption from this 80/20 rule. The difficulty here of making it across the board is whether we are comfortable that we source money domestically - Singaporeans' money - and then after that, it is like a conduit, we send it overseas for all sorts of causes. In the tsunami case, it was clear cut - this is something we would support. But as he knows, causes on an international basis are quite diverse and widespread, and not all are worthy of support. So that is the policy decision that we have to make.

Dr Wang Kai Yuen: May I seek your indulgence to ask further questions on NII? Since the Minister has responded, I presume it is all right to ask. He mentioned that the decline was due to a special dividend last year. My question would be: do we account NII contribution to the budget based on a fixed percentage of the total NII return of the fiscal year? Or the Minister has the flexibility to decide how much of NII would be accounted into the current year's budget and the balance of it would go into the reserves. I think, perhaps, there should be some transparency because, otherwise, looking at the budget, one really could not tell whether we are tapping the appropriate amount of NII to meet the budgetary requirement.

Mr Raymond Lim Siang Keat: The short answer to that is that we are tapping the full 50%. So whatever is declared for that year, the dividends and the income on a net basis, we take 50% of that. So, in a particular year, if there is a special dividend, it comes into the NII and we would take 50% of that.

Dr Wang Kai Yuen: Mr Chairman, I understand the Constitution allows us to tap up to 50%. Is the Minister saying that we always tap 50%?

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Mr Raymond Lim Siang Keat: That is up to us. We do not have to tap the full amount of 50%; if not, then it would go into the reserves.

Dr Wang Kai Yuen: Yes, that was my question. Do we consistently tap at 50%?

Mr Raymond Lim Siang Keat: We have the discretion. We have the discretion not to take the full amount. But, in practice, and he saw the chart which we showed, in recent years, without the NII, we would have run into a deficit. And the NII is what pushes it up. So, we have been using the full 50%.

Dr Ahmad Mohd Magad: Sir, I agree with Minister Wong that it is indeed enlightening in the sense that it does allow us sufficient time to ask some questions and get further clarification. Sir, in spite of taking a well-deserved rest from what I imagined to be a very colossal task of putting together and delivering the Budget, and subsequently responding to the multitude of issues raised by many Members, I appreciate Prime Minister and Finance Minister Lee's attentiveness in both the PMO and MOF Committee of Supply proceedings. I would also like to take this opportunity to thank the three Ministers for their detailed answers to the various issues raised by several hon. Members. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The sum of $357,738,290 for Head M ordered to stand part of the Main Estimates.

The sum of $418,207,200 for Head M ordered to stand part of the Development Estimates.

The Chairman: Mr Leong, you may take your two cuts together.

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Performance Indicators for Government Agencies

Mr Leong Horn Kee (Bishan-Toa Payoh): I wish to commend the Government for publishing the Ministries' and their agencies' yearly performance indicators in the Government's expenditure estimates or so-called Budget Book. However, the indicators published should provide useful information. Generally, the public and taxpayers are not only interested in how much money is spent by each Government agency on a specific programme. They are also keenly interested in knowing whether they are getting value for money spent.

Let me quote a few performance indicators that do not give any information whatsoever. For example, under the Ministry of Finance, IRAS publishes the number of annual income tax returns issued yearly. This data in itself has no information or performance measurements. What will be more pertinent is to measure and compare the number of annual income tax returns, for example, processed by each staff yearly, rather than just the number of returns submitted.

The second example is that the Ministry of Transport publishes the operating cost of Ministry's HQ as a percentage on the Ministry's total cost. This again has no meaning in terms of performance measurement. The public will be more interested to know, for example, the cost of construction per kilometre of road built, which is a more important information for them.

The third example is the Ministry of Health. In its mission statement, it is mentioned that it intends to promote health and lower infant mortality. However, the Ministry's performance indicators do not give such statistics. It only gives a performance indicator, for example, on the number of establishments inspected by the Ministry. The public

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actually would be more keen to know the national infant mortality rate or maybe the average time for each consultation at the A&E ward.

I am afraid that the Ministries are merely giving lip service to their performance indicators which are published. Most of the indicators give no information. They seem to be published just for show. In such cases, I do honestly feel that it is not worth the bother of collecting and publishing these indicators. It is waste of time, effort and money.

Sir, the Prime Minister and Minister for Finance in his Budget Statement stated that he had instructed all Ministries to cut another 3% budget cap across the board. I am concerned that such a measure is actually a very blunt instrument. The repercussions are not controllable and some Ministries would simply resort to cut some minor staff positions or chop off programmes that have useful social benefits.

For a more targeted approach, I would like to ask the Prime Minister and Minister for Finance whether he would pass instructions down to all Government agencies and Ministries to do a thorough review of all their respective performance indicators. Ministries' yearly performance should then be evaluated based on output using the indicators as reference. I am sure that this manner of review will lead to a far better financial accountability and more efficient use of funds, thereby creating a leaner and more efficient Government.

Government Accounts

My next cut is on Government Accounts. I wish to raise the issue of accrual based versus cash based accounting practice of the Singapore Government. I note that Australia and New Zealand have converted to accrual based accounting. Corporations and

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businesses have long adopted the accrual basis of accounting for good reasons. Accrual based accounts generally give a better and more complete picture of the state of health of an entity. The main weakness of the cash based accounting is that it is short term. The accounts can show a net surplus for the current year and hide the huge financial losses yet to be realised in the following years. A cash based account does not adequately reflect the cost of future generations of present Government policies and commitments, such as the failure to cater for future infrastructure programmes or social needs. Many countries like the UK, USA, China and India have realised that successive past governments have allowed infrastructures, such as roads, sewers and schools to run down because the cash based method does not need to account for future obligations.

In some instances, the governments do not want to convert to accrual accounting basis because it is more expedient to use asset sales to cover for budget deficits, eg, sale of land, sale of national corporations and even sale of natural resources. The accrual based budgeting system reflects better the total state of health of the national accounts because the accounts show the changing values of assets and also potential liabilities.

In addition, the cash basis accounting creates a curious phenomenon that all Government agencies rush to spend monies allocated in the current financial year's budget towards the end of the financial year. This mad rush to spend the remaining money allocated may cause unnecessary expenses to be incurred or create a distortion to the yearly accounts.

Sir, I note from the Hansard that as far as 12 years ago, in 1993, Assoc. Prof. Koo Tsai Kee had pleaded earnestly in this House for the Government to consider

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converting to the accrual accounting method. However, the then Finance Minister, Dr Richard Hu, turned down the proposal. I hope that today I would not get a stock "no" answer from the present Finance Minister.

Sir, the greatest evil of cash based accounting is that many misdeeds and mistakes of Government can be swept under the carpet using cash accounting. The simplest trick is just to defer payments and expenses to the following year so as to show a profit for the current year. We pride ourselves as a clean and honest Government that would not fiddle with the national accounts. However, to further enhance the exemplary image of good governance, I would strongly urge the Government to consider adopting the accrual basis of national accounting. Although this may be a very massive exercise, perhaps the Minister for Finance would like to consider it for adoption, even if not now, but in the future.

Casino

Mr Steve Chia Kiah Hong: Sir, with the Government's plan to build an integrated casino resort, what is the projected tax revenue and profits from this investment that will go into the Government's coffers? And considering the negative social consequences, what is the expected benefit going to Singaporeans for supporting such a casino project?

With the expected increase in Government revenue, can we expect to see a possible reduction in the GST? Or more reductions in the corporate and/or income tax rate? Or more new Singapore shares to be given out? Or more Medisave and MediShield top-ups for citizens? Or will we see greater Government revenue and expected rise in the GDP figures, because of this casino project translated into higher bonuses for our Ministers and civil servants only?

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Sir, to answer our hon. colleague, Mr Tan Soo Khoon's question to me yesterday, I am hesitant about supporting the casino project here because of the negative social consequences such a project will bring. However, I am prepared to commit and support it if this casino project will translate into less financial burden and taxes for our general population.

Sir, if the Government is prepared to give an undertaking that it will cut GST, corporate and/or personal income tax further once the casino revenue comes in, then I will be more prepared to speak in support of this integrated casino resort project. Otherwise, there is no deal.

Tobacco and Liquor Duties

Mr Ong Ah Heng (Nee Soon Central): (In Mandarin) : Sir, the Prime Minister and Minister for Finance said just now that because 2,500 people die every year from tobacco related diseases, the Government increased the tobacco tax to prevent this. According to official statistics, a lot of older people smoke. Why do we increase tobacco tax and not liquor tax? If people drink and drive, it will also cause a lot of deaths. So I tell some people that next year, the liquor tax will surely go up. But they told me that because our Ministers and MPs drink, therefore there is no increase in the liquor tax. Since Ministers and MPs do not smoke, the tobacco tax was increased. I would like the Minister to explain why the liquor tax is not increased this year.

The Acting Second Minister for Finance (Mr Raymond Lim Siang Keat): Sir, I would like to thank Members for their comments and suggestions.

To begin, I think it is useful to put things in context. I think it bears repeating the changed fiscal environment that we

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are living in right now. Going forward, our revenue growth will be slower, because the economy would have more moderate growth. And against that, there will be persistent pressure for spending to increase because of demographic changes, ageing population, structural changes and vulnerable workers. More than ever, we need to husband our resources carefully and spend prudently. We must continue to establish limits on our spending through budget ceilings, maximise discretion, ensure the best value for money and, like Mr Leong Horn Kee said, measure performance accurately.

Let me now turn to the need to establish limits to budget ceiling. This is a point germane to what Mr Inderjit Singh brought up. He says that we should have stringent cost control. He says that one way to do that is to incentivise staff by sharing the benefits when there is a suggestion that leads to cost decreases. We have various schemes to do this. One way in which we have done this is that we have introduced Net Economic Value in the Ministry's cost assessment. And if there is a positive delta in the net economic value, some of the gains will be shared with the staff.

I think the overall picture is important. If you look at what we are doing to ensure that we have a lean and trim government, and you compare that on an international basis, this is how it looks like.

Singapore's public spending share of GDP is already among the lowest in the world. Our total expenditure is about 17% of GDP, very low, compared to 40% in the UK; 54% in France; 50% in Denmark and 55% in Sweden. Unlike many other countries, we have been able to prevent public spending from spiralling upwards by setting pre-determined caps for the overall Government budget. This means establishing limits by setting Ministries' budgets as a percentage of GDP.

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Our operating revenues have averaged about 16%-17% of GDP in recent years, and we expect this to be the case over the medium term. Thus, the limit we have set for total expenditure is also about 17% of GDP. This global limit sets the parameters for establishing the block budget caps of the Ministries.

We have cut the budget caps of Ministries across the board, like Mr Inderjit Singh said, by a total of 5% - 2% in FY 04 and now 3% in FY 05.

Mr Inderjit Singh brought up the point: why not a permanent cut to the budget allocation of Ministries in dollar terms? However, if we were to do that, it means a real cut in Ministries' spending. It is an absolute reduction in the amount of resources available to Ministries to carry out their functions. Government is a people-intensive operation. Costs and wages tend to track GDP growth rather than last year's costs.

Ministries also require some certainty and stability in their budgets to carry out their operations. Commitments in infrastructure, for example, require sustained investments over a few years. If we chop and change budgets from year to year, Ministries will not be able to plan properly for the future. So it is far better that they have a formula that they can work to but, at the same time, make plain that their budgets will go up and down with the state of the economy. This forces Ministries to optimise on their allotted resources. Ultimately, we have to determine the appropriate size of the Government in relation to the size of the economy.

If the economy is growing, it is not possible for the public sector to shrink in absolute terms because the demands on the public sector will grow as the economy grows. But we will strive to keep the growth of Government's spending within nominal GDP growth so

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that Government's spending remains bounded at a constant percentage of GDP.

5.15 pm

Now, if we expect to be firm on budget ceilings, we must provide Ministries maximum discretion on how they spend their budgets. This makes sense because Ministries know their businesses far better than MOF can or should. By maximising discretion, we also prompt Ministries to seek more innovative and cost-effective ways of achieving their desired outcomes within their budgets. As part of maximising discretion, we have introduced budget flexibilities, such as carry forwards which allow Ministries to carry forward to future years' budgets that they are entitled to but do not need for that year, advances which allow Ministries to borrow against their future years' budgets to meet more urgent current needs and automatic rollovers which allow Ministries to bring up to 5% of their unspent budgets for that year to the following year. Because of this budget flexibility, the year-end spending spree that has, at times, been a problem for Ministries, has been alleviated. With carry forwards and automatic rollovers, there is really no need for Ministries to rush to spend their money at the end of the financial year. Nevertheless, we must recognise the expenditure for the last quarter would tend to be higher than the previous quarters. This is a natural outcome of conservative management of expenditure budgets. Where it is necessary to spend on an item, but there is some flexibility on timing, it makes sense for the Ministry to delay its expenditure to later in the year, because, you never know, more urgent or more pressing matters might come up. However, as risks of unexpected event abate towards the end of the financial year, the Ministry can then proceed to

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spend on items which are not so pressing but still necessary.

Let me now turn to the other element which is to ensure that we get the best value for money. Public expenditure management is not just about getting our allocations right. The Government also has a responsibility to continually seek the best value for taxpayers' money. This is why we put in place initiatives such as Best Sourcing, the Manpower Management Framework, Economy Drive and the Cut Waste Panel. The Prime Minister has already addressed concerns on Best Sourcing and the Manpower Management Framework.

Mr Teo Yock Ngee said that we should have very close consultation with the unions. I fully agree with him. This is very important because we accept that the ongoing efforts in restructuring, computerisation, streamlining in terms of processes and best sourcing in the public sector, might lead to redundancies. In these instances, communication with the affected staff is of utmost importance. Agencies will continue to work very closely with the unions and consult them regularly. They will give early notice to the staff affected and, as far as possible, redeploy them within the agency. Retrenchment should only be the last resort and affected staff would be released from the service on fair and reasonable terms. In addition, agencies will assist staff in the transition to new jobs, for example, by working with the Workforce Development Agency.

Next, the Economy Drive. The results from the Economy Drive, now in its second year of implementation, continue to be encouraging. Public agencies have been actively implementing economy drive initiatives. They will result in savings of about half a billion dollars in FY 2004.

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Dr Loo Choon Yong asked, in this context, if there is a more cost-effective way to carry out Government's public relations and exercises (PRE), say, by centralising all such functions under MICA. Our PRE expenditure covers a whole range of things - official visits by foreign dignitaries, conferences, workshops and seminars organised and funded by the public sector, campaigns and public education exercises such as Total Defence and mass media programmes. The biggest users of our PRE expenditure are MHA, PMO, MTI, MICA, MFA, MCYS and MINDEF. I know that Dr Loo will agree with me that in each of these instances, the demand for Government to do more by way of public education and communications has increased.

Post-September 11, MHA's public education efforts on civil defence and MINDEF's messages on Total Defence obviously have to be stepped up. Diplomacy and trade promotion efforts that come under MFA, MTI and PMO also have to be increased as we build up our relations with other countries. And the public education campaigns, under MICA and MCYS, are essential for social and community development. There is a wide variety of public communication messages and activities and it would simply not be practical or wise if we bring them all under one agency.

Dr Loo also asked about our mass media expenses. This is actually very low. It is less than 10% of PRE expenditure; it is about 7%. On the media carrying public education messages for free, we must be realistic and not expect the media to do advertising and promotion for free. The media is already doing their part in communicating the messages to the public, through news reports and commentaries.

Mr Inderjit Singh asked whether or not the Cut Waste Panel is useful and whether it has sufficient traction. As at

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1st February 2005, the Cut Waste Panel has received more than 3,100 suggestions. It has agreed with the points of feedback raised in 85% of the suggestions relating to wastage in the public sector. Of this 85%, 3% contained new ideas which should be implemented, 24% raised ideas that the public agencies are already doing and 58% contained feedback which the agencies have already taken into account in current practices and policies. It is understandably difficult for the public to suggest major changes for the public service as they are not familiar with the detailed workings and processes in the public sector agencies. But, nevertheless, we have had some very useful suggestions. One suggestion was that MINDEF's GP cars should use lower grade petrol, ie, 95 octane rather than 98 octane, because they are driving on normal roads, and these have saved the Government about $10,000 a year. Another suggestion has led to the Traffic Police sending requests for the particulars of offenders by registered mail, only if the recipient failed to respond to the first request sent via ordinary mail. That has saved the Government $113,000 annually.

I now turn to Dr Wang Kai Yuen's pet subject for this year's Budget. He suggested that we consider the use of offsets in Government's defence procurement to help create jobs for locals, and the Government should set up a multi-agency committee to further study this. We do not practise offsets for general Government procurement. Not only are offsets incongruent with our general economic policy or free market competition, but they are also in violation of our WTO obligations on general Government procurement and our commitments under our various bilateral Free Trade Agreements. Although the WTO GPA does offer one, and only one exception, which is pertaining to "procurements indispensable for defence purposes", there is no compelling reason

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for MINDEF to depart from the 'clean price' policy in their major acquisition programmes.

The link between offsets and job creation for the Singapore economy that Dr Wang makes is also a tenuous one. Whether it is "Economics 101" or "Economics 501", the basic lesson of economics is that there is no free lunch. If we want defence procurement to also serve our job creation objectives, somebody has to pay for it. And the question you must ask yourself then is whether incurring higher costs for defence procurement is an effective way of helping our local workers. In the past, MINDEF had used offset to some extent. But the benefits, in terms of technology transfer to local companies, job creation for local workers and additional value-add for the Singapore economy, were found to be limited. We are therefore not convinced that the uncertain benefits of offsets are worth the higher costs of defence procurements that the Government will have to bear.

Now, I turn to the point that Mr Leong Horn Kee brought up, which is on key performance indicators (KPIs). This is important because if you are going to give maximum discretion to the Ministries, in terms of their allotted budget, then there must be some way to ensure accountability, and I agree with him. Mr Leong has suggested that all Government agencies state and publish appropriate key performance indicators. We have right now, as he pointed out, key workload and performance indicators in the Estimates book, which I think he referred to. I think some are realistic and some, perhaps, could be improved upon.

Performance indicators need to be observable and verifiable to provide meaningful analyses. They also need to be adjusted as needs and priorities change. The problem is that, sometimes, the indicators that are very easily measurable

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are not very relevant to the desired outcomes, and those that are relevant to the Ministries' desired outcomes are quite difficult to measure. But we will keep on looking for good KPIs. We will take into account the suggestions that he has made, and if he has any others, he should let us know. The Ministry of Finance would be happy to hear them.

Mr Leong has also suggested that the Government move to be more like companies and adopt the accrual basis for national accounts. In adopting the basis of accounting, we must be clear about the purpose for which the accounts are being drawn up. The main reason why companies prepare their accounts on an accrual basis is to allow a better match of their costs and revenues for profit reporting. In fact, over and above the accrual accounts, many companies track their cashflows religiously as a key operational and management tool. Our statutory boards maintain their accounts on an accrual basis to better define their operating surplus or deficit. However, the Government's budget, which is submitted to Parliament for approval, is based on a cash basis because this gives Parliament the most direct control on the resources to be made available to Ministries. The imperative of accrual accounting to define profits does not apply to the Government, because the imperative of cash accounting to direct control resources for expenditure is overriding. But Ministries apply elements of accrual accounting to enhance their financial and resource management. For example, when a Ministry needs to know the total costs of delivering a service, and it decides to fix a charge for it, it will supplement its cash cost with accrual elements like the depreciation cost and imputed rental of a Government facility.

Ministries are also required to keep a fixed asset register to track physical

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assets and to calculate the depreciation of these assets. Governments in most countries are still relying on cash basis of accounting for financial reporting and budgeting. The key advantage of the cash basis is it is simple, objective and prudent. It instils discipline in the allocation of budgets. It would not allow a government, for example, to make a $300 million expenditure on a facility look like a $10 million commitment which is the annual value of the depreciation if taken over 30 years.

MOF officers have been following closely the development of public sector financial reporting in other countries. We are aware, as Mr Leong pointed out, that in certain countries, like New Zealand, Australia and the United Kingdom, they have implemented the accrual basis of accounting. Their experience has been mixed - on whether the additional complexity and effort of accrual accounting have indeed led to better expenditure control and discipline, or the cash control is in the end the most direct way to influence government programmes. Mr Leong asked, what about the future, will that change, well we will keep on monitoring this - and as you know, in life, "never say never".

Let me now address the other issues Members have raised. Mr Steve Chia has asked what we intend to do with the tax gains that the Government expects from the casino. Let me remind Mr Chia that we have not yet decided to have a casino. We are still studying the feasibility of an Integrated Resort in Singapore, including the option of having a casino as part of such a resort. Now, the strategic objective is tourism growth rather than revenue. It is to expand our range of tourism offerings. The whole economy benefits if we have more tourists, and they stay longer and spend more. But there are negative effects on society which we have to consider carefully before a final decision is taken on the

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casino.

So, it is too early to speculate on the tax revenue that a casino might bring.

5.30pm

Quite frankly, I do not understand why Mr Chia thinks that bringing in a casino into Singapore would lead to bigger pay cheques for civil servants and Ministers. Many arguments - and I follow these quite carefully - have been made on whether or not we should have a casino. But no one has made the extraordinary leap that Mr Chia has made on this particular matter.

Mr Ong Ah Heng made a very colourful speech. He asked whether we are unwittingly penalising older Singaporeans by raising tobacco duties. We are not. As Mr Ong has alluded to liquor duties, that perhaps Ministers or civil servants might have a particular partiality for good wine, I would like to assure him that when we decide to raise duties, be they on tobacco or any other matter, we always do it soberly.

In this case, we were motivated by serious public health concerns which cut across age segments, and in particular the young. Seven Singaporeans die each day from smoking-related causes. The problem has been compounded by the prevalence of low-price cigarettes which makes smoking more affordable. Each pack of low-price cigarettes costs $1.00 to $3.00 less than conventional brands. More are turning to low-price cigarettes rather than quitting. 42% of smokers in Singapore today smoke low-price cigarettes compared to only 33% just one year ago. Studies have shown that higher tobacco duties do encourage more to quit and fewer to start. We have been progressively raising tobacco duties over the years, and this has helped reduce smoking among the population at large. But, as I said earlier, we are actually concerned about the young, and young women in particular. In 1992, 2.8% of

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women aged 18 to 24 smoked. By 2001, this has tripled to 8.2%. We decided to further raise tobacco duties this year to help curb smoking, especially among younger Singaporeans. I hope that they will think twice before picking up the habit. I also hope that existing smokers will seriously consider quitting.

Sir, our fiscal landscape has changed. The era of large budget surpluses is over. International competition is driving our taxes down, while demographic changes are driving demands in public expenditure up. The norm, going forward, will be fiscal tightness. The need for sound fiscal management is thus all the more critical. Sound fiscal policy, a lean and trim Government, and a low tax burden contribute directly to the economic well-being of Singapore. They sustain investor confidence and free up resources for the private sector. By remaining lean, efficient and effective, the Government creates the enabling conditions for a more dynamic and entrepreneurial economy while providing adequate services to meet the needs of Singaporeans.

Mr Steve Chia Kiah Hong: Sir, I seek a point of clarification. The purpose of the Integrated Resort is to promote and increase tourism. Would increasing tourism not help to increase our GDP and indirectly increase Government revenue? At the same time, with the tax revenue that we collect from the casino, if we have a casino, would it not add to the Government revenue? All these increases in our GDP and GDP growth, would they not result in bigger bonuses for Ministers and civil servants, since bonuses are pegged to the growth in the GDP? That is my first point. Secondly, the Minister has not answered whether it is prepared to give an undertaking to cut the taxes, if revenues are coming in from the casino.

Mr Raymond Lim Siang Keat: I think we need to put this in context. If we have a casino, it is not a magic bullet, that once

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we have that, it is a quick-fix and the economy will then start going on a sustainable growth path. If we do have a casino, it is but one of many initiatives that we are introducing to enhance economic growth. So, it contributes to it.

The second point that the hon. Member brought up, whether we will give an undertaking if, due to the casino, there is this huge surge in our tax revenue and whether, because of that, we will start to cut all the other taxes. Firstly, it is unlikely to happen, because it is just one particular element of many things that have to be done. Secondly, we already seek to keep all taxes as low as possible. This is the overall policy. In terms of whether or not and how much revenue we are going to get from the casino, right now it is premature, because we have just got the concept proposals in, so we do not have the numbers.

Mr Steve Chia Kiah Hong: Sir, if the Minister by his answer says that we may not collect much revenue from the casino, then I do not see the point why, after considering all the negative social consequences, we should still go ahead with the casino project. We are prepared to support having a casino if it is bringing in revenue for the Government and that results in lower taxes for the people.

Mr Raymond Lim Siang Keat: That is not quite right. Whether it is a casino or a biomedical hub or promoting Singapore as an education centre, why we are doing this is to generate economic growth, so that there are economic benefits for all Singaporeans. When we do this, it is not in order to raise our tax revenue. In fact, the way we are proceeding with the casino is to ensure that we have a competitive tax structure, not to maximise the amount of revenue we want to get, but really to maximise economic growth

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for Singapore by taking initiatives like these.

Sports as Charitable Purpose

Assoc. Prof. Chin Tet Yung (Sembawang): Mr Chairman, one of the most heart-warming parts of the Budget speech to many, I think, without a doubt, is the part on promoting community development and philanthropy. Almost to a man and woman that I have asked have welcomed the approach taken by the Government, particularly in relation to recognising sports as a fifth charitable purpose. Many say, "It is about time", "It is an excellent move", and "Well done, Minister for Finance."

Much has been talked about sports before and how difficult it is to find money to fund sporting activities. Efforts from some of us, who have been advisers to football clubs, have failed and we have not been able to induce Mr Roman Abramovich to come to Singapore to fund certain clubs. We all know that the salary of one Chelsea player can fund the whole team in Singapore easily, maybe a couple of teams, depending on which teams we are talking about.

So, one can only have praise for the move to recognise the advancement of sports as a fifth charitable purpose. It is a bold and novel move, and it may very well work this time when none has worked so well before. More donors will now put money into sports, and many sporting associations will no doubt benefit from this. But, at the same time, one wonders whether from the fifth charitable purpose it will become the most popular charitable purpose. The reasons are obvious. With naming opportunities and extensive media coverage of sports, many corporations may find that donating to sports is an excellent way of getting publicity where they have not advertised before.

So, the question that we need to ask is whether this would have an adverse

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effect on donations to other charities when funds now move to sports rather than other charitable purposes. In this respect, I want to ask the Minister a few questions. The first is this: what is the scope of this charitable purpose of advancement of sports? If we talk simply about healthy lifestyle, it could easily have been included under the other head of "purposes beneficial to community", which has been defined to include advancement of health. Putting a separate purpose, ie, advancement of sports, as a separate head of charity seems to suggest something else. Is it suggesting that we want to encourage charitable support for competitive sports? I think that many want to see Singapore do well in international competitions and so on and, if that is the case, what sort of sponsorship are we looking at? What sort of sports are we looking at? How do we decide which sports to support, and how should we allow corporations to donate to sports? Do we, for example, allow naming rights? Do we allow them, in other words, to advertise and, at the same time, get charitable relief? If so, as I said earlier, sports will definitely be the most popular charitable purpose, and this might divert funds from other charitable purposes.

The other point that I wish to make is that now that the advancement of sports is regarded as a charitable purpose, I hope that more attention be given to the developing and nurturing of sports individuals rather than associations. In many cases, we may want to support a Tiger Woods or an Andrea Agassi or whoever it is, to give Singaporeans sporting heroes rather than just Singapore Idols, although somebody told me that moving one's mouth is also a physical assertion and therefore should be regarded as a sport, as is the shuffling of cards.

At the end of the day, I think all of us want to see Singapore doing well in sports, both internally as well as

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internationally. I do think that this addition of a fifth head of charitable purposes would indeed add to our sporting improvement in both fields.

With that, we fully support it, but we would like to know how exactly this charitable purpose would work.

Institution of Public Character Code

Dr Chong Weng Chiew (Tanjong Pagar): Sir, the Council on Governance of Institutions of Public Character (IPC), at the end of last year, has published proposed guidelines seeking feedback from current IPCs. The proposed guidelines cover almost every aspect of the administration and operation of charities, from fund-raising practices to financial management, from financial disclosure to recruitment and staffing practices. It includes checks at every level of the fund-raising process, especially for fund raisers that bring in more than $1 million in cash.

While most VWOs and donors welcome the recommendations for more transparency, implementing many of them comes at a cost, both in terms of time and resources. For example, the Ministry of Finance and the Commissioner of Charities' Office in IRAS have proposed that charities make available online financial details, such as all incoming receipts, including donations, grants, membership fees, investment income. Other information includes expenses incurred, the balance sheet, the total wages of the top three key employees, and their ratio of reserves to annual expenses. Without a doubt, this will result in extra administrative burden. Implementing the rules requires elaborate computer systems, more manpower to track, distribute and monitor every event, and this costs money. Ultimately, the donors will have to pay for it. Staff at the VWOs also get the sense that they are not trusted and they feel demoralised. May I

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suggest that we ease up on some of the requirements and, to counteract any potential abuses, put in place avenues for reporting of abuses, a framework for investigation, heavy penalties for those who have been discovered to have abused the trust of the Government and the public. That is not to penalise all the good and sincere IPCs while we try to sieve out the black sheep.

5.45 pm

Goods and Services Tax

Dr Ahmad Mohd Magad: Sir, I read with concern an article in the New Paper dated 13th February with the caption "Broke but must pay $30,000 GST". The article is about a charitable organisation which has to fork out the said amount in GST despite being $100,000 in the red. I suspect that many charitable and voluntary welfare organisations (VWOs) which do not come under the umbrella of the Community Chest are currently experiencing a serious plight. The majority of them have difficulties meeting their donation targets, especially in the last several years of the uncertain economic climate and unforeseen events such as SARS, and the more recent tsunami disaster. The increased competition for the charity pie among more than 1,700 charities here is also stiff. Donors are also fatigued by the many repeated requests for donations from the same sources. As a result, many VWOs also went into deficits.

Sir, part of the problem here stems from VWOs not being able to claim GST incurred in their operating expenses from the Government, unlike commercial business organisations. Also, a $5 million input GST grant which was meant to cushion the impact of GST of VWOs and small charities has lapsed quite sometime back. Charities and VWOs play an

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important role in rendering meaningful services to Singaporeans and complement many services rendered by the civil service, particularly by social agencies. In view of the current economic difficulties faced by many VWOs and small charity organisations, I would like to ask the Minister if he could consider reviving a similar GST grant for another five-year period to ease the burden on such organisations.

Charities and Voluntary Welfare Organisations

Ms Eunice Elizabeth Olsen (Nominated Member): Sir, I believe, at last year's Committee of Supply debate, the Finance Minister was asked not to levy the goods and services tax on structures built for and items bought by the disabled. The answer was no.

This year, I shall try a different tack as the intent behind the call to help our voluntary welfare organisations is a good one. Most of our charities are small. They generally raise small amounts and run up higher overheads in fund-raising. The ability to provide services at a nominal cost gets affected by rising costs. At the same time, to ensure they remain tax-exempt organisations, registered charities must spend 80% or more of its total receipts on its charitable objectives.

Although the GST rate has risen from 3% to 5%, this rule did not change. The hike means that welfare groups must raise more money from the public to pay GST, especially for big ticket items. Of course, the GST is here to stay and charities cannot be shrouded from it. I am not asking for them to be exempt from paying GST but, given the Government's "spend less, tax less" philosophy, the job of caring for the poor or other disadvantaged groups falls mainly on their families or the VWOs. So if there are ways to support our charities, we should do so.

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The Government already helps to fund approved programmes run by VWOs but it does not want a culture of entitlement to take root in Singapore. Then why not allow a charity to claim input tax credits for all taxable purchases used to carry out voluntary activities that meet its charitable objectives? It would be like how any GST-registered company can claim an input tax credit for things that are used to make taxable supplies. I know that in the case of VWOs, activities like providing free services for the benefit of the public do not constitute taxable supplies. Now they can only claim a portion of that input tax credits. But if the intent is to support our charities in the long term, its specific outcome is good, should we not tweak the GST law to achieve our social objectives as laws are meant to do? After all, it is not the activity that is non-taxable. If a company were to provide meals and goods for a segment of the public for payment, it would be taxable. If a charity were to do exactly the same, but for free or subsidised without commercial returns, it would not be taxable.

So let us allow a charity to claim all input tax credits as opposed to a portion for all taxable purchases for activities that meet its charitable objectives even if they do not constitute taxable supplies, unless actual harm can be shown to be done from this move. I propose that this be offered to VWOs which provide direct welfare services that benefit a specific group, for example, resident care for the elderly, day rehabilitation for the disabled and home help for the disadvantaged families. And it would start with smaller VWOs whose turnover is less than $1 million a year. It should not be difficult to do this if we really want to do it.

The Minister of State for Finance (Mrs Lim Hwee Hua): Sir, let me thank Members for their comments and questions.

Sir, there is a Chinese saying, " yuan qing bu ru jin lin ", or simply, that a

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neighbour close by is better than a relative living far away. As the family size shrinks, the extended family and the community will play a more crucial role in providing companionship, sharing common interests and offering support to Singaporeans in time of need.

The people sector will increasingly be a key pillar in building the Singapore community. Institutions of a Public Character (IPCs) are key people sector organisations. They have done much good work, providing a wide range of programmes from helping the needy to promoting the arts. IPCs have mobilised and energised Singaporeans in a constructive way, and enhancing social responsibility towards the larger community. Public support for our IPCs has grown, on average, by about 15% a year in the last four years. In 1999, Singaporeans donated an aggregate amount of $300 million to IPCs and this amount has increased to over $500 million by 2003.

Sir, Singaporeans are a generous people. In last Sunday's Lianhe Zaobao , Miss Xie Lixuan, a reporter of Shin Min Daily News , recounted how she was personally moved by an elderly man who handed her $100 to help the Yishun siblings who are suffering from a disease which causes their nervous systems to degenerate. The man was in his 70s and lived far away from the Media Centre but he asked her for the bus number and insisted on handing her the money personally. He arrived more than an hour later in sweat, handed her two crumpled $50 bills and left. The elderly declined to be interviewed, refused to have his photograph taken and did not leave his name behind. This is truly a case of " you xin bu pa yuan ".

When there is a need, Singaporeans always respond to the call and never hesitate to go out of their way to help. Under the leadership of my parliamentary

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colleague, Mr Ong Ah Heng, the grassroots and the media, a total of $260,000 was raised for the siblings. Sir, this is but one example of the Singapore community in action.

To encourage even greater public support, IPCs need to preserve confidence and assure the public that they subscribe to good governance, accountability and transparency. This means defining some common standards and best practices. But, Sir, to what extent should this be done? I agree with Dr Chong Weng Chiew that we must do this in a sensible way, balancing the benefits of regulation against the cost of compliance. We must adopt a risk-based regulatory approach that targets rules at areas of greatest risk or which gives rise to public concern. We must also recognise that IPCs vary significantly in size and expertise. For large IPCs raising substantial amounts from the public, rules may be needed to ensure accountability. However, the same rules could well be inappropriate for the smaller IPCs.

The Council on Governance of IPCs set up by the Ministry of Finance has developed a set of recommendations for suitable standards of governance for IPCs. These are preliminary recommendations. The Council will view them after carefully evaluating the feedback that they have received from the different stakeholders, including IPCs and members of the public. The Government will then consider the Council's final recommendations.

Let me assure Dr Chong and Members that we will not adopt a one-size-fits-all approach. Our intention is to nurture and groom the people sector to play an even bigger role in our society and, certainly, not to stifle its growth with onerous rules. We also believe that IPCs would and should themselves be responsive to the needs of their various stakeholders and

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adopt practices that best serve their own individual needs.

Sir, as mentioned in the Budget Statement, to support the growth of the people sector, the Government will explicitly recognise as charitable purposes several initiatives which we now group under other purposes beneficial to the community, namely, the advancement of health, the advancement of citizenship or community development, the advancement of the arts, heritage and science, the advancement of environmental protection on improvement, the relief of those in need by reason of age, ill health, disability, financial hardship or other disadvantaged and, finally, the advancement of animal welfare.

At the same time, we will also recognise the advancement of sport in so far as the sport advances health, which is itself a charitable purpose. This is because we want to recognise the importance of sports in promoting a healthy lifestyle for all. In 2003, the UK, likewise, recognised sport as a charitable purpose. Community amateur sports clubs in the UK already qualify for charity status. I would like to thank Prof. Chin for his suggestions on how we can draw up the qualifying criteria for the type of sports and sports organisations. We will work out the criteria over the next few months, in consultation with the Ministry of Community Development, Youth and Sports, the Singapore Sports Council, the Singapore National Olympic Council and the sports community. Let me assure Prof. Chin and Members that we will adopt an inclusive rather than an exclusive approach. However, the guiding principle must be sports which promote good health and physical fitness. The consequence could, of course, be an enhancement of the competitive standards. As regards the extent to which Government funding of expenses should be given between the different sporting associations or the VWOs, I would

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suggest that the Member raise this under the Head for MCYS.

To encourage charitable giving among individuals and corporations, the Government will grant double tax deduction not only for outright donations, but also for donations with naming opportunities. Donors who name an IPC, an IPC facility or an IPC event, can thus qualify for double tax deduction. This applies to donations to all IPCs, and not just IPCs which promote sport. It should therefore not skew corporate giving towards sport which Prof. Chin was concerned about. Companies frequently have a well-defined focus for their corporate social responsibility initiatives. What we want to achieve through this change is for more donors to come forward to support sport, the arts, the environment, the needy or any other charitable cause they feel passionate about, and to build lasting relationships with the beneficiaries they have lent their names to. Let me reassure Prof. Chin that while we now encourage naming donations, we will continue to disallow double tax deduction for outright advertising such as banners.

Next, let me thank Dr Ahmad Magad and Ms Olsen for their suggestions on what more the Government can do to help VWOs especially with the cashflows. Although I understand the Members' concerns, I am afraid that the answer is still "no". I do not think that giving VWOs a GST refund or relief is the best way to go. Let me explain why.

Sir, we deliberately designed our GST as a simple and broad-based tax. It is applied to all goods and services consumed locally, except financial services and the sale and lease of residential properties. This means that other than GST-registered organisations, all individuals and organisations, including VWOs, cannot claim the GST incurred on their local consumption. This keeps the

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GST system simple and helps to reduce compliance cost for everyone. Rather than complicate the GST system with separate rules for VWOs, a better way will be for Government to provide targeted help for VWOs on the GST expenses.

When GST was introduced in 1994, the Government increased its assistance grants to VWOs to include the GST component. This policy remains unchanged to this day.

Government grants for VWOs include help to meet GST cost. Such VWOs include the Muhammadiyah Welfare Home, the Movement for the Intellectually Disabled in Singapore (MINDS), the Lions Home and the Dover Park Hospice. Government assistance in development costs, where the assistance could be up to 90% of the building cost, includes the GST component as well, and Government grants for operating cost include the GST component as well. Hence, there is no need for a separate input GST grant as the earlier grant was transitional in nature.

6.00pm

The Government appreciates the good work that VWOs do in providing vital community services. In addition to assistance grants, the Government supports VWOs in other ways. For example, VWOs which qualify for charity status are exempted from income tax if they spend at least 80% of their annual receipts on charitable objects in Singapore, within two years. They are also exempted from property tax for those premises used exclusively for charitable purposes. VWOs which qualify for IPC status can allow the donors to claim a double tax deduction on the donation. This would help VWOs attract more donations.

VWOs which already have both charity and IPC status include the Asian Women's Welfare Association and the Spastics Children's Association of

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Singapore. For this Budget, the Government has announced a package of additional incentives to promote community involvement and philanthropy. These incentives demonstrate the Government's desire for the people sector to grow, build up strong community spirit and encourage and engage citizenship.

Sir, charity must be conveyed with the heart and with willing hands and not delivered impersonally by a faceless bureaucracy. If everything is done by the Government, we would simply be building an entitlement mentality. Singapore's strength must lie in the willingness of the strong, the able and the successful to care for those who need help.

Dr Wang Kai Yuen: Mr Chairman, we still have time. I seek your permission to ask some questions.

The Chairman: Yes.

Dr Wang Kai Yuen: I asked two questions in the debate on the Budget Statement. The Minister did not respond and he said I could ask the details in the Committee of Supply. My first question was on NII - why is the NII proportion this year dropped by 30%? The second question was on vehicle tax. Why was vehicle tax increased at the same time when the projected quota premium collection decreased? Perhaps, with your indulgence, maybe the Ministry can clarify.

The Chairman: It is not quite a clarification. Does the Minister wish to take it now or later?

Mr Raymond Lim Siang Keat: I will take the Member's first question on NII. He was comparing figures for last year and this year and he asked why there was a drop. Last year, there was a special dividend from Temasek. But, on the

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whole, the average figure is about 1.2%, which is the figure we see in the Budget Statement.

Dr Wang Kai Yuen: I have looked at the Budget Statement and see that the vehicle related taxes go up this fiscal year, but concurrently the quota premium collection is projected to decline, also by a similar proportion in the coming fiscal year. So my question is: if we levy the collection based on the same number of vehicles, how is it that, on the one hand, tax goes up; and, on the other hand, quota premium drops?

Mrs Lim Hwee Hua: Sir, the projections are based on a whole host of assumptions which relate to the vehicle population growth, the rate of deregistration, as well as the projection into COE premiums themselves. The net result is as what the Member has just described.

The Leader of the House (Mr Wong Kan Seng): Sir, I think we are managing our time very well. One of the reasons why we have made some modifications to this year's Committee of Supply, by asking MPs to limit their speeches in the whole Committee of Supply to 18 minutes and 20 minutes for GPC Chairman, is to allow this free flow of debate and questions, for a more interesting exchange. Information could be shared and Members could ask more questions. So Members are encouraged to do so. If Members still have questions, please raise them, but they must be related to the Finance Ministry and, hopefully, related also to the cuts that were being made. If Members ask for some old data, for example, the Ministers may not be able to answer them immediately as they are not walking encyclopedia.

Dr Loo Choon Yong: Mr Chairman, Sir, yesterday I brought up this question of the 80/20 percent rule, that 80% of the donation must be spent in Singapore. I wonder whether we are prepared to

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abolish this rule or, at least, make sure that the Commissioner grants exemption more freely to bona fide organisations with activities in the region.

Mrs Lim Hwee Hua: Sir, where it involves granting tax exemption, certainly the conditions would have to be stringent to ensure that the benefit flows back, hence, the 80% rule. But we would certainly evolve the system as we go along and we would bear that suggestion in mind.

Dr Loo Choon Yong: We have noticed from the recent tsunami crisis that we win a lot of goodwill from our neighbours. So, if we actually have more people-sector volunteers going into the region, doing a lot of mission, it would actually be good for Singapore when we exhibit our good neighbourliness. I would urge the Ministry to seriously think about this. If it is not 80/20, how about 50/50, and only for bona fide organisations?

Dr Teo Ho Pin: Mr Chairman, Sir, I especially asked in the debate on the Budget Statement about the increase in the skilled foreign worker levy. I mentioned that because a lot of construction and marine contracts were called on for a certain period, if we increase this levy, it is not fair to the contractors and also the shipyards because they have already tendered based on the old amount of foreign worker levy. So I am asking whether the Finance Ministry would take my suggestion to only increase the levy for new foreign workers, whereas the existing foreign workers should be paying the same rate.

Mr Raymond Lim Siang Keat: Dr Teo might want to raise this specific point under the Manpower Ministry, Head O. But it is being phased in right now - in July, and then in January - to take into account this sort of transitional arrangement.

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I just want to come to Dr Loo's point, because he mentioned the tsunami case. What we did in the tsunami case was that we granted exemption from this 80/20 rule. The difficulty here of making it across the board is whether we are comfortable that we source money domestically - Singaporeans' money - and then after that, it is like a conduit, we send it overseas for all sorts of causes. In the tsunami case, it was clear cut - this is something we would support. But as he knows, causes on an international basis are quite diverse and widespread, and not all are worthy of support. So that is the policy decision that we have to make.

Dr Wang Kai Yuen: May I seek your indulgence to ask further questions on NII? Since the Minister has responded, I presume it is all right to ask. He mentioned that the decline was due to a special dividend last year. My question would be: do we account NII contribution to the budget based on a fixed percentage of the total NII return of the fiscal year? Or the Minister has the flexibility to decide how much of NII would be accounted into the current year's budget and the balance of it would go into the reserves. I think, perhaps, there should be some transparency because, otherwise, looking at the budget, one really could not tell whether we are tapping the appropriate amount of NII to meet the budgetary requirement.

Mr Raymond Lim Siang Keat: The short answer to that is that we are tapping the full 50%. So whatever is declared for that year, the dividends and the income on a net basis, we take 50% of that. So, in a particular year, if there is a special dividend, it comes into the NII and we would take 50% of that.

Dr Wang Kai Yuen: Mr Chairman, I understand the Constitution allows us to tap up to 50%. Is the Minister saying that we always tap 50%?

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Mr Raymond Lim Siang Keat: That is up to us. We do not have to tap the full amount of 50%; if not, then it would go into the reserves.

Dr Wang Kai Yuen: Yes, that was my question. Do we consistently tap at 50%?

Mr Raymond Lim Siang Keat: We have the discretion. We have the discretion not to take the full amount. But, in practice, and he saw the chart which we showed, in recent years, without the NII, we would have run into a deficit. And the NII is what pushes it up. So, we have been using the full 50%.

Dr Ahmad Mohd Magad: Sir, I agree with Minister Wong that it is indeed enlightening in the sense that it does allow us sufficient time to ask some questions and get further clarification. Sir, in spite of taking a well-deserved rest from what I imagined to be a very colossal task of putting together and delivering the Budget, and subsequently responding to the multitude of issues raised by many Members, I appreciate Prime Minister and Finance Minister Lee's attentiveness in both the PMO and MOF Committee of Supply proceedings. I would also like to take this opportunity to thank the three Ministers for their detailed answers to the various issues raised by several hon. Members. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The sum of $357,738,290 for Head M ordered to stand part of the Main Estimates.

The sum of $418,207,200 for Head M ordered to stand part of the Development Estimates.