New Singapore govt-backed fund could help plug growth financing gap: Inderjit Singh

Inderjit Singh, an entrepreneur and former Singaporean politician. Credit: DEALSTREETASIA

Former Singapore parliamentarian and entrepreneur advocate Inderjit Singh is outspoken on the need for reforms to key elements of the city-state’s entrepreneurial ecosystem, including government policies and regulations to foster and accommodate local innovations. He also believes that in order to stay competitive, the city-state’s cost structures – particularly property rentals and land costs – need to be brought further under control.

Singh, who was born in India’s Punjab state, believes that while Singapore has worked to create a conducive environment for entrepreneurs by easing bankruptcy laws and working on facilitating access to capital, what is critical to its future and the success of its entrepreneurial ecosystem is a shift in mindsets.

In an exclusive interview with DEALSTREETASIA, he shares his perspectives on Singapore’s entrepreneurial ecosystem, the role of the government and possible reforms to pursue.

Edited excerpts:

During the time you were in Parliament, you spent a number of years promoting the entrepreneurial agenda. Now, what’s your take on the current state of Singapore’s entrepreneurial ecosystem?

I pursued this path of promoting entrepreneurship and trying to influence positive changes in order to encourage more entrepreneurship, startup ecosystem development as well as the growth of small & medium enterprises (SMEs); I experienced difficulties when I started out as an entrepreneur in terms of the rules and regulations, as well as securing financing and support from the government in general.

This was greatly lacking in Singapore, as it was mainly an environment that sought to support the bigger multinationals that the government brought in. When I entered Parliament, this was something I wanted to champion, in order to help future entrepreneurs.

One initiative I pursued on my own was to study the financing landscape for SMEs. I formed a committee completely on my own – it wasn’t a government initiative – and managed to get entrepreneurs, banks and even government representatives to sit on this committee. We went around the world studying all the methods for SME and startup financing.

The outcome was a book called “Recommendation for Financing of SMEs”. We started this effort in 2001/2002 and our report came out in 2002/2003. The good news was that when the government heard about this, they got me to present my findings to them and accepted all our recommendations. Over the years we implemented many of these things.

Around the same time, the Economic Review Committee was established – I was a member of the committee – and we looked at entrepreneurship and the role of the government in business. I was chairing one of the subcommittees, and we reviewed areas where the government could reform policies to create a better ecosystem.

That initiative led to the formation of the Action Community for Entrepreneurship (ACE), where I served as the deputy chairman for a number of years. And through ACE we did many things to change the whole landscape.

From 2000 to 2010, we spent time getting the ecosystem fundamentals such as rules, regulations, financing and changing the government mindset. We’ve made tremendous progress and see a lot of changes in the last 10 to 15 years. However, the last few years have seen the environment become tougher and Singapore become less competitive than other places worldwide.

We’ve made a lot of progress in changing the environment and the government is still motivated to listen. But our competitiveness is starting to be an issue, with our entrepreneurs facing greater difficulty, which I hope we can change.

At this stage, what are the core issues that are impacting our competitive edge, and how do we create a sustainable competitive advantage as an entrepreneurial hub?

Singapore’s biggest problem is our cost competitiveness, which has gone beyond the optimal level. Singapore cannot be the cheapest place in the world, but neither does it have to be the most expensive destination globally. In fact, if we look at the services sector on a global basis, we are among the most expensive cities in the world. We’ve been like that for many years now and there are some areas where we can optimise costs for businesses.

The second area is financing, While early-stage equity financing for ventures is quite accessible now – any good idea can find financing – the problem is that growth-stage enterprises face a big gap in debt and equity financing.

Debt financing has become very difficult as local and foreign banks in Singapore have become very conservative in the last 2-3 years, with some foreign banks even exiting the SME market. Even local banks have scaled back their servicing of SMEs in Singapore, so debt financing is challenging.

On the equity side, we’ve done a good job of attracting many businesses to be based in Singapore from 2000-2010 through direct government financing. The government, in 1999, set up a S$1 billion fund to co-invest in business in Singapore, and that brought several enterprises and funds to be based here. Subsequently, tax incentives brought more quality businesses to be based here.

The bad news? There’s not as much funding of Singapore-based companies as we’d like. They’re using Singapore as a base to finance companies around the region, or in India and China. Singapore is a small market, but there are Singapore companies that address a global market and experience difficulty in securing equity financing. So there’s this gap in growth-stage financing that needs to be plugged and no one is really playing a big role down there yet.

What’re the fundamental drivers of the current cost structure that’s impacting Singaporean businesses?

The main area is the cost of real estate. We’ve opened up our gates to foreign investment into all sorts of properties, which has driven up prices in residential properties. An employee who wants to afford a residential property needs a higher salary, otherwise, he can’t afford this property. So wages will have to go up because property prices increase

Secondly, we’ve also had a substantial investment in commercial and industrial properties, which is where SMEs and startup need the space. But this has seen rentals drive up due to the investment philosophy in Singapore.

Arguably, we overdid the REITs, property trusts and property investments in my opinion; not all of all of it adds value to the economy. They’re just investment plays where investors gain but there’s no real value creation for the economy or country. REITs have to give returns to their investors and as an outcome have to increase rentals regularly.

Utility costs over the years have also not been optimal There’s a reason why the government wants to keep it at that level, but we may not be competitive, say, compared to utilities in the US, Taiwan or some of the countries we compete with. And some of these government charges and taxes  – as well as the many hidden taxes like those for fuel and water – all of these add up.

Moreover, wages have increased not just because of real estate but also because we’ve squeezed foreign labour over the last few years in reaction to the 2011 General Election outcome. The government basically has completely squeezed and reduced the intake of foreign workers. Understandably, this was because Singaporeans were unhappy, but that has caused a big squeeze in labour availability, which has driven increases in our cost structure.

In Singapore, we have a founder’s narrative where many local venture capitalists (VCs) are too conservative and slow in their deployment of capital, while also claiming local capital markets are too conservative to incentivise them to pursue an exit via an IPO on the SGX. Meanwhile, local VCs complain of a lack of quality deal flow and innovative companies from Singapore. Can you weigh in? 

We were quite late in our drive to promote entrepreneurship and innovation So it’s a matter of 10-12 years before we’ve actually seen the outcomes, and we’re starting to see good outcomes right now. At the same time, VCs should be able to see some good ideas that they can invest in.

Companies who want attention have to address a global market from the beginning. Entrepreneurs cannot just be thinking that they can start here, raise some money and then go overseas. But at the same time, my advice to VCs is that there are some good ideas down here and they need more patience. Then, maybe they’ll get the returns they deserve. But many VCs have a fund lifecycle and LP commitments, so they cannot wait.

This is where funds like Temasek, for example, could play a developmental idea. The Singapore government has money and could launch an additional state fund modelled along Temasek lines that can focus on the gaps that other venture funds don’t cater to.

The other issue is exiting via IPO in Singapore, which involves actually raising funds from the local stock market. Compared to many other countries, the time for Singapore firms to get to a listing is too long. We must be able to bring our enterprises to the stock exchange more rapidly. This way, we can raise funds from a bigger pool of people.

The problem is that the SGX is too conservative, with excessive regulations and restrictions, so much so that companies are finding it very difficult to list on the local bourse and instead head to Hong Kong and the ASX. Another matter is liquidity – Singapore should be a regional market – but regional companies don’t see us that way and we’re not getting the attention that the likes of Hong Kong or Australia receive.

This is a chicken and egg situation, but if we don’t have the liquidity then people won’t list here. That’s driving the cycle of delistings and subsequent re-listing in Hong Kong, and it is down to the liquidity and valuations. The SGX needs to revamp itself to become far more vibrant than it is now.

I can give you two examples of the first part of how it’s so difficult to list down. I give you my own personal example.

I started UTAC Group in 1998. In 2000, I was ready to list the company. It was a technology company with high growth and good profitability. I went to the SGX and they said no, as we were two years old and too new for them. On the Nasdaq, they love this category. So while the Nasdaq approved my company, the SGX declined it.

So I knew we had to start on the NASDAQ. After I got Nasdaq approval, I went to the SGX who were now willing to do a public float around the prospectus I had used with the Nasdaq. I had a second company and it was the same thing in 2004; the SGX declined it while the Nasdaq approved it. I conducted an investor roadshow and everything else. So there is the difference. Even the NASDAQ is willing to list a company from Singapore that the SGX will decline.

The other problem is that the listing cost is high. We created the Catalist board but it has not been a great market. The cost of maintaining a listing is very high and the amount that many firms raise is low. In fact, it’s not attractive to list on the SGX, and that’s a pity. So we have the problem of this gap in growth-stage financing, coupled with a stock exchange that isn’t an attractive place to list.

Singapore has a lot of government financing – EDBI, SPRING SEEDS Capital, Temasek Holdings, Heliconia Capital, Vertex Venture Holdings, Startup SG, SGInnovate – and then you have government-linked corporations (GLCs) like Singtel and ST Engineering with their own corporate venture funds. Does all this government-linked capital actually distort the incentives for entrepreneurial ventures and is the presence of so much public funding for private sector enterprises beneficial in the long run?

If we look at all these funds, each of these agencies has their own KPIs and operates in their own silo. When that happens, a company that could be funded by one agency can also be funded by another. It’s best to have one or two agencies that can focus on supporting local enterprises, which would be a more suitable strategy.

Early-stage financing should be controlled in a few key places. But what has also happened is that they’ve ended up making it too easy to raise funding at an early stage.

If you’ve read the report by Professor Wong Poh Kam’s about zombie companies, rather than getting stronger many firms simply become larger. He’s got a good point. But at the same time, I would say that it’s not so bad if it is seen as part of the larger effort to seed and drive the formation of more companies, some of which will make it.

If we refer to the examples of Silicon Valley, Taiwan and Israel – models for when we first started trying to do this entrepreneurship thing – we’ve reached a point where we’re getting people who are willing to start companies. And we’re at a stage where we have really solid companies that are coming out which are seeking out growth funding.

Last year, the government announced the merger of SPRING and IE Singapore. Their role is to focus on startups all the way to large enterprises. So they need that kind of largesse in order to be able to help companies at the different stages of their growth.

Founders and VCs cite concerns over talent and cost as inhibitors but we have managed to remain globally competitive to an extent. How sustainable is the ecosystem in Singapore?

It’s scary because we aren’t changing fast enough, especially if you look at disruption by technology and the effects of globalisation. You’re seeing massive disruption of traditional business models and changes coming from automation and robotics.

A lot of the reports and research I’m reading indicates we’ve got to change more rapidly. But the government is the bottleneck for this right now, because they believe in their past model of success and think this will continue to work. The past model of success saw it develop a multinational-driven economy, and we were attractive for a long time.

But today, there are many nations around the world who can provide the same kind of appeal for a lower cost and offer a greater availability of talent and a larger market. Our advantages are being eroded and we cannot depend on that anymore.

We should have shifted gears 10-15 years ago and focused on supporting local enterprises that can be grown into large global corporates. The government was content with SMEs being the supporting players for the big MNCs when we should have made them a focal point of local economic development.

The whole bottleneck is the government’s economic strategy and if this doesn’t change, then it’s too late. By 2030, 50% of the jobs as we know now would be gone. And if we cannot create new jobs, then it’s not a viable situation.

However, if we get the government to change their mindset and get the manpower and resources mobilised to execute the necessary changes, then we’re nimble enough to act as a centre for Asia. But the government has to first let go and not be the bottleneck.

You’ve expressed concerns about the Committee for the Future Economy (CFE) report by the Singapore government in 2017. In your view, what should be the pillars of the innovation agenda for the future?

The CFE was something that everyone was really looking forward to. There was an expectation that if something came out, it would inspire us and show the government realised the changes needed for a future economy. When the report did come out, it was just many old initiatives being rehashed. So it was all about things being tried and tested, but with some fine-tuning. Nothing new came out of it, which was the biggest problem.

What were we looking for? Ideas about the new pillars of the future economy. Innovation definitely is one, with overseas expansion as the second wing of our economy. But we already discussed that 20 years ago and are just rehashing things.

They’re all the right things to do, but the only way to do it is if we change our approach. For instance, there’s lots of intellectual property (IP) in the universities and research institutes. How can we accelerate their commercialisation and entry into the market? Don’t make the transfer of technology so expensive or difficult.

The CFE implementation team needs to explain how they’re going to go about fostering and implementing innovation. Currently, there are no great ideas.

A problem with our economic planning model for many years was about focus on growth plays at the moment. A group of smart civil servants sit down and review world trends, achieve a consensus on what Singapore needs to get involved in and then try to develop that industry cluster here.

The last CFE had addictive manufacturing as a focus area, which is great. But the mistake we’re making is that we have got some very solid industry clusters that we’ve neglected.

In the past, we had the semiconductor sector, but after 10-20 years, the government lost interest in it and felt we should shift our focus. We actually should concentrate on deepening our skills and capabilities in each of these industry clusters and continue to run them as long as possible and innovate on them beyond cost, not just give up on them.

A good example is Belgium, which has had a strong textile industry for a long time. Today, they’re still a major player in textile manufacturing, automation, technology, all the parts of that value chain.

Hopefully, the CFE understands this need for a different approach and really shows the nuts and bolts of how to build up innovation capacities and how we’re going to create the future economy.

How do you see the road ahead panning out for Singapore’s venture ecosystem as the regional economy grows?

It’s important we continue to have the VC funds, especially those growth-stage funds, be based in Singapore, as well as focus on improving the quality of our local startups. There’s significant potential for us to actually spin-off companies from the research that our universities and labs conduct. Our track record of creating companies from the research is very poor.

If we can improve that mechanism, we will need many of these funds to participate in supporting these companies. So we need to retain and grow the critical mass of funds here. We also need to have a government-managed fund, like Temasek in the 1970s, but focused on startup funding and operating on the basis of being long-term investors that can provide patient risk capital. What is missing in Singapore is a large fund that can support and nurture companies as they grow.

As we focus on the quality of startups, their numbers will grow. But there’s also a case for the government to review some rules and regulations to see if they can be simplified. An example is Smart Nation, which we’ve talked about for years; NETS [Singapore’s local electronic payments network] was 30 years ago, and we never moved beyond NETS.

Today, China is a major player in e-payments and other related fields.You know the first country to invent mobile payment? You know which country was that? Kenya in 2007. With what Kenya did and what China has done implies that we are not doing things the correct way.

China allowed the private sector to develop all these tools. Once they were working, it built regulations around it to accommodate them. In Singapore, we are starting with many rules and regulations, and the private sector is facing difficulty in trying to innovate. The regulator sandboxes are not realistic.

We need to expand the real environment but because of regulations, we’re stifling our move towards being a Smart Nation. I’ve been in London, Paris and Israel and I’ve seen the momentum in their own equivalents of the Smart Nation initiatives. It’s been tremendous in these countries – especially Paris – and while I saw it as a slow, bureaucratic country, that’s all changed. The world has caught up and overtaken us.

In this space, the government needs to seriously review why our Smart Nation initiatives are not working out. We must have an ecosystem that allows experimentation and flexibility. Once this comes up, the VCs will be more interested in backing the various initiatives.

We’ve seen projects in Singapore being tested before taken overseas, but Singapore isn’t a realistic environment because it’s too controlled. So what you test here may not work overseas, and I’d rather that rules and regulations be flexible to permit new ideas to thrive and accommodate innovations.

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